Bankruptcy and student loans

| Sep 17, 2020 | Bankruptcy

Paying back student loans is problematic for a decent number of graduates. With high loan amounts and high interest rates, the monthly payment amount is often too high for many to pay along with rent, food and other necessities. 

There is a general understanding that bankruptcy does not wipe out student loans. Although it is extremely difficult to discharge these loans via bankruptcy, there are some cases in which the courts ruled in favor of the loan holder. 

Student debt and the courts

According to National Public Radio, it is a myth that bankruptcy cannot eliminate student debt. Although this is true, it is much more difficult to get rid of student debt than it is other debts. Congress has made it challenging to include the debt in bankruptcy filings, and those that do must meet a standard of undue hardship, although there is no standard definition of what this looks like. 

In general, proving this hardship takes more work by an attorney which, in effect, increases legal fees. People filing for bankruptcy often cannot afford it, and so it is an estimate that 99% of those filing will not even attempt to discharge the debt. 

However, some research shows that when someone does put forth the effort, about 40% of cases receive some sort of help from the courts, such as the discharge of a portion of the loan, a reduction in interest or both. 

Recent student loan discharge

In fact, according to Forbes, the U.S. Court of Appeals for the 10th Circuit upheld a lower court’s decision to fully discharge a private student loan debt. To prove undue hardship, the borrower needed to introduce an adversary proceeding against the loan lender. Although the costs involved with this may be too much for some, in this case it was worth it, as the court approved the discharge of the $120,000 loan. 

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