My belief (and the belief of other attorneys I know) was that that in order to get a discharge of student loan debt, it had to be shown in bankruptcy that the education one obtained as a result of the student loans was completely worthless. It turns out that is not the standard.
11 U.S.C. § 523(a)(8)(B) permits the discharge of such loans when failure to do so would "impose undue hardship on the debtor and the debtor's dependents."
In the case, Matter of Robinson, 999 F.2d 1132, 1134-1135 (7th Cir. 1993), the Seventh Circuit looked at that statutory language and adopted the following test for determining "undue hardship," which test was first set forth by the Second Circuit in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir.1987) (per curiam):
"[U]ndue hardship" requir[es] a three-part showing (1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for [himself] and [his] dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans."This year the 9th Circuit reversed and ordered a reinstatement of the bankruptcy court's discharge of a law student's student loan debt, actually a partial discharge - $50,000 forgiven of $80,000 owed. The case, Hedlund v. Education Resources Institute, Inc., received some press which suggested a new era was dawning in the discharge of student loans. My examination of the case though revealed the 9th Circuit had simply concluded that intermediate appellate bodies were improperly reweighing evidence and not giving proper deference to the bankruptcy court which found discharge was proper.
Nonetheless, articles on that case led me to others discussing discharge of student loans in bankruptcy. This one below takes the form of a reader letter and response written by Steve Rhode, the "Get Out of Debt" guy who blogs for the Huffington Post:
I"m going through bankruptcy but my attorney said no to trying to discharge student loans.
I currently have almost 300,000 in student loan debt with Sallie Mae, most of which is 'private loan' vs 'government backed'...
I started these loans, with my father as a co-signer, in 2001 until 2008. As of 2011, I started re-paying them in a 'reduced interest' program to lower my payment. Without the program my payment would be $2500+ a month. Now I pay $1090....even that is too much. I 'll be paying it off till the day I die and its still so high that I have filed for bankruptcy. I cannot afford a car ....much else...its depressing. I have my 341 hearing on Aug 7th. my attorney flat out told me my loan wont be discharged.
I am not a bankruptcy attorney. I am a writer and researcher. So what I can tell you definitively is not if your bankruptcy attorney is right or wrong but what the cases I've reviewed and written about show.
In These Private Student Loans Can Be Easily Discharged in Bankruptcy I go into detail about the accreditation, provide a link to check and give examples of what is not a qualified higher education expense. (Note: there is an issue of a possible lack of accreditation with respect to Michael's higher institution, which lack of accreditation would make it much easier to get a discharge.)
I also provide actual case examples that show loans matching these criteria being discharged without a fuss.
...my recent research showed quite a number of federal student loans discharged in 2012. And even if the loans are not full discharged, there still appears to be a benefit to pursuing an adversary proceeding to work out a better deal.
The 2012 data on federal student loans in bankruptcy showed 47% were discharged in full, 21% resulted in a better payment, and 12% settled for less than was due.
It also seems critically important to understand if there still is a cosigner on your loans or the cosigner was released.
Here are a couple of more research articles to review, here and here.
Please post a comment with updates so I can stay tuned on what happens.
Get Out of Debt Guy
Rhode has written on this subject for the Huffington Post on other occasions.
I am struck by Mr. Rhode's analysis that, with regard to federal student loans in bankruptcy, 68% of the time there is an improved situation for the borrower, and 47% of the time there is a complete discharge. One would think private student loans would have an even higher discharge rate.
Nonetheless, it appears that student loan debt discharge requires not only the filing of the bankruptcy, but the initiation of an adversarial proceeding within the bankruptcy court, a process many attorneys outside of those doing bankrutpcy on a regular basis probably would not know.
To conclude, federal law allows the discharge of certain student loan debt when there is an "undue hardship" and the Seventh Circuit as well as others have identified as requiring that three things be proven:
(1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for [himself] and [his] dependents if forced to repay the loans;In this era of drastically increasing student loan debt, debt that often leads not to a profitable degree but rather a lifetime of impoverishment, bankruptcy might prove to be the only ticket out.
(2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
(3) that the debtor has made good faith efforts to repay the loans.
Note: The Huffington Post has been all over the looming student loan debt crisis and related stories. Here is a sampling:
Student Loan Defaults Surge To Highest Level In Nearly 2 Decades, September 30, 2013
Student Loan Forgiveness Program Available To Millions Who Aren't Utilizing It, CFPB Says, August 28, 2013
Average Student Loan Debt Could Cost A Household $208,000 Over A Lifetime: Study, August 4, 2013
12 Student Loan Debt Numbers That Will Blow Your Mind, April 11, 2013