Student Loan Bankruptcy Discharge, A Hardship!

by Kent Anderson, Esq.

July 30, 2009

It is hard, not impossible, to discharge student loan debt in bankruptcy. Only government guaranteed loans were protected from discharge before 2005, now student loans from private banks are protected.  To qualify for discharge, payment of a student loan must present an undue hardship to the debtor or a dependant of the debtor.  The exceptions to discharge in bankruptcy are listed in Section 523 of the bankruptcy code.  A student loan, public or private, is exempted from discharge by Section 523(a)(8).  That section expressly prohibits discharge of a debt for an educational benefit that is given or guaranteed by the government or any other educational loan that is defined in section 221(d)(1) of the Internal Revenue Code.  That pretty much covers all types of loans to students used for school.

Many courts have adopted the Brunner Test for discharge of student loans.  The Bankrutpcy courts in Oregon are part of the 9th Circuit and require debtors to satisfy the requirements of Brunner to qualify for discharge of student loans.  While there is little statutory support for the additional requirements placed by courts on discharge of student loans, the educational debt collectors have had a field day defending student loans against claims of hardship from borrowers burdened by repayment requirements.

The courts have expanded the definition of an educational loan, under the 2005 standards, to include debts that are created by student credit charges to an educational institution With this broad new definition of a non-dischargeable student loan, there is likely to be more student borrowers with non-dischargeable debts following them long after the completion of their education.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.

Last modified: October 22, 2012