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Student loans, generally, are not
dischargeable under any chapter of the Bankruptcy
Code unless the borrower can show "substantial
hardship." A student loan can be discharged
or modified in a hardship proceeding. This is an
adversary proceeding and requires the filing of a
Complaint to Determine Dischargeability. A discharge
will be granted if proved that repayment of the loan
will create a substantial hardship on the
debtor/borrower and his or her family. The hardship standard is generally
interpreted to mean that the debtor cannot maintain
a minimally adequate standard of living and repay
the loan at the same time. Further, it
also requires a showing that the conditions that
make repayment a hardship are unlikely to improve
substantially. Courts in some circuits will
permit the judge to find that the debtor can repay a
portion of the loan without hardship, and to
discharge the balance of the loan.
Student loans are contracts like
any other loan and are subject to challenge for
fraud, etc. Also, students loans are not
enforceable when the school has closed prior to the
student completing his education. These
challenges could be raised in a Chapter 13
proceeding and decided by a bankruptcy judge.
In the usual Chapter 7, there is no dividend to
creditors and thus no reason for the bankruptcy
court to rule on the enforceability of a claim,
outside of an adversary proceeding to obtain a
hardship discharge.
A pervasive problem in student
loans is the state of the lender's records:
the loan has been transferred several times and it
is not clear just what is owed and whether all the
additional charges are in accordance with law.
Consider using an objection to the
claim of the holder of a student loan in a
Chapter 13 to get a judicial determination of the
rights of the borrower. In bankruptcy, the
burden of proof is on the creditor. Once a
judge decides what is properly owed,
principles of collateral estoppel should make the
decision of the bankruptcy court binding on the
lender even if the repayment period on the loan
stretches beyond the end of the plan.
There is some small comfort in the
federal regulations which restrict the amount of a
student/borrower's wages that can be garnished to
repay a student loan to 10% of the borrower's take
home pay. Of course, the lender has the right
to intercept tax refunds and apply them to the loan.
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