Death of the parent or dependent student discharges the obligation to pay a Federal Parent Plus student loan. Most people learn the hard way that student loans are difficult if not impossible to discharge in bankruptcy. The seminal case, In re Bruner, has been discussed on this site.
(Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 [2d Cir. 1987]) and requires a debtor to prove hardship prevents repayment of the loan, based on this three prong test:
(1) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student 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.
But the Federal Parent Plus Loan contains a contract provision, buried deep in the small print, that provides, at paragraph 14, for discharge upon death or permanent disability:
14. Loan Discharge My loan(s) will be discharged
if documentation of my death or the death of my
dependent student for whom I acquired a loan is
submitted to my lender.
My loan(s) may also be discharged if a physician
certifies that I am totally and permanently disabled as
defined by the Act. In addition, I must meet certain
income requirements and may not receive any
additional FFELP, Direct, or Federal Perkins Loans
during a 3-year conditional discharge period. I may
not receive a discharge due to total and permanent
disability based on a condition that existed before
the loan was made, unless a physician certifies that
the condition substantially deteriorated after the loan
Ominously, the contract contains this warning:
My loan(s) will not automatically be discharged in
bankruptcy. In order to discharge a loan(s) in
bankruptcy, I must prove undue hardship in an
adversary proceeding before the bankruptcy court.
Andy Miofsky, Esq.
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Last modified: January 12, 2012