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Student Loan Debt and Bankruptcy

Student Loan Debt Relief Southern California Bankruptcy Attorneys

Southern California Bankruptcy Law Firm Since 1970

Student loan debt is a nondischargeable type of debt. But bankruptcy may still be a viable option.

To learn about more about filing bankruptcy and minimizing student loan pressure, contact the Law Offices Of Hagen & Hagen in Woodland Hills, California. Certified bankruptcy attorney Jeffrey Hagen does not negotiate with lenders to reduce your payments, but he will help you achieve debt relief through the bankruptcy process.

Contact Our Offices

If you are dealing with student loan debts and are considering filing bankruptcy, please contact the Law Offices Of Hagen & Hagen to discuss your options with a Southern California student loan bankruptcy attorney.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Getting out of one's student loan obligations in bankruptcy case is a very difficult and potentially expense proposition.

The general rule when one files bankruptcy is that the debtor is discharged of his or her debts. There are a number of "automatic" exceptions, such as taxes, alimony and child support, and...student loans.

But then there's an exception to the exception: if you can demonstrate to the satisfaction of the bankruptcy judge that repayment of those student loans would constitute an "undue hardship," then the student loan or loans will be discharged.

But bankruptcy judges do not routinely find that repayment constitutes an undue hardship.

Note that discharging one's student loans in a bankruptcy proceeding does not relieve any co-obligors from their obligation to pay those loans.

Note that the burden of proving undue hardship is the debtor's, i.e., it's your burden to prove that an undue hardship exists; it is not the student loan guarantee company's burden of proving that it does not exist.

The seminal case in the student loan dischargeability area is the early 1987 Brunner opinion out of the state of New York, which was originally adopted here in the Ninth Circuit in an opinion named Pena and then numerous opinions that have re-interpreted and re-adopted Pena. Brunner and Pena adopted a three prong test. First, the debtor must demonstrate that, based upon a "minimal" standard of living, repayment of the student loans is virtually impossible. Courts have interpreted that first prong as requiring that you've done everything within reason to maximize your income and minimize your expenses but still cannot afford to make the required payment. Second, the debtor must demonstrate that there are "additional circumstances" which will make repaying the student loans just as difficult in the future as it is in the present. Courts have interpreted this prong in a variety of ways over the years, originally requiring that you demonstrate some sort of permanent mental, physical or emotional disability, but ultimately scaling back that prong to require the debtor to demonstrate that circumstances are so overwhelming that repayment of the loans will be virtually impossible over the remaining life of the loans. The third prong requires a showing that you've made a good faith attempt to repay the loans. Courts have similarly been all over the map in interpreting that prong as well. Some courts have found good faith as long as you've made at least one payment, others have found good faith if you even sought a deferment or forbearance, but others have required a showing that you've at least inquired into the viability of income contingent repayment programs often offered by the William D. Ford Direct Loan program.

In the opinion of many, the second prong is the most difficult to prove. If the debtor is bright, educated, articulate and relatively young, and many seeking student loan discharges fall into that category, many judges will conclude that although repaying the student loans in the present may not be disputed, especially in this economy, the debtor is capable of getting a well-paying job and repaying all or at least most of the student loans.

Note that courts here in the Ninth Circuit have the authority to "split the baby," i.e., to conclude that you can afford to repay a portion of the loan or loans even if you can't afford to pay the whole amount. Judges, in other words, can partially discharge student loans.

Note also that challenging the dischargeability of student loan debt in a bankruptcy is litigation and is therefore potentially quite expensive. Occasionally the student loan guarantee company is willing to compromise quickly, but all too often they fight vociferously, potentially making the matter go all the way through mediation, discovery, and trial. Be prepared to have to pay a minimum of $10,000.00 to prosecute such a case, and that's just for the adversary proceeding; that fee does not include the cost of the bankruptcy itself. We understand that it is a bit incongruous to argue on one hand that you can't afford to repay the student loans and on the other have to pay at least $10,000.00 and potentially more in order to get out of those loans.

Note that student loan guarantee companies are rarely willing to negotiate a hardship discharge of student loans unless a bankruptcy is filed and an adversary proceeding initiated. You will not likely be able to negotiate a satisfactory compromise unless and until a bankruptcy case is filed.

Summarizing, the key factual questions that will determine dischargeability include:

  1. What is the balance of the loan or loans? Is the amount large enough to justify the cost of trying to get out of the loan or loans?
  2. Marital status?
  3. How much do you and, if applicable, your spouse earn?
  4. What other income comes in the door, such as pension income?
  5. What is your age, i.e., how many years left in the working world do you realistically have remaining?
  6. Can you demonstrate that you've done everything within reason to maximize your income? Sent out resumes? Gone on interviews? Explored the idea of taking a second job? Explored the idea of renting out a room?
  7. Can you demonstrate that you've done everything within reason to minimize expenses, such as living in an inexpensive area? Giving up the expensive car? Spending as little as possible?
  8. Can you demonstrate a good faith attempt to pay?

We hope the above is helpful.

If you have student loan debt and have already used all available forbearances and deferments, student loan lenders and/or guarantors may file suit or enforce a judgment against you. By filing a Chapter 13 petition, you can force the student loan lenders and/or guarantors into a payment plan of up to five years. During this time, you will pay a small percentage on the dollar toward your student loans. As long as you are making payments likely according to the Chapter 13 plan's terms, student loan lenders and/or guarantors cannot take action against you or your property.

At the end of the plan's terms, you will receive your discharge, but since student loan lenders and/or guarantors are generally not discharged, you will owe the portion of the student loans that were not paid during the Chapter 13 proceeding, plus the interest that accrued during the plan's duration.

Contact Our Offices

If you are dealing with student loan debts and are considering filing bankruptcy, please contact the Law Offices Of Hagen & Hagen to discuss your options with a Southern California student loan bankruptcy attorney.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.