Student Loan Debt and Bankruptcy

Are you having trouble making student loan payments? There could be several factors affecting your ability to make the payments. The good news is, at The Law Group of Northwest Arkansas LLP, we have knowledgeable bankruptcy attorneys experienced in student loan discharge. Our attorneys can provide a free consultation to determine if you might qualify for student loan discharge.

The U.S. Department of Education, led by Secretary of Education Betsy DeVos, recently announced that it will discharge $150 million in student loans. Qualified borrowers will have their student loans discharged due to school closings. Therefore, if you were enrolled in college between November 1, 2013 and December 4, 2015, and your school closed while you were enrolled, you could be eligible to have your student loans automatically discharged. About half of the borrowers who qualify for automatic school closing discharge attended Corinthian Colleges, Inc., which closed on April 27, 2015.

If you are not qualified for an automatic school closing discharge, you may still be eligible for student loan discharge. Federal student loansare difficult, but not impossible, to discharge in bankruptcy.

How Does It Work?

Student loans are one of the few debts that are typically not dischargeable in bankruptcy due to the high burden of proof the debtor must meet. To begin proceedings, the debtor, or the debtor’s attorney, must file an adversary proceeding claiming that repayment will impose an undue hardship on the debtor and the debtor’s dependents.

Most courts use the “Brunner Test” to determine the financial hardship. However, the Eighth Circuit, which includes Arkansas and Missouri, adopted a totality of the circumstances test. The totality of the circumstances test requires courts to evaluate a “debtor’s past, present, and reasonably reliable future financial resources, the debtor’s reasonable and necessary living expenses, and ‘any other relevant facts and circumstances.’” Educational Credit Management Corp. v. Jesperson, 571 F.3d 775, 779 (8th Cir. 2009) (citing In re Long, 322 F.3d 549, 554 (8th Cir. 2003)).

Under the totality of the circumstances, the debtor has the “rigorous” burden of proving undue hardship by a preponderance of the evidence. In a recent case to discharge student loans, the Eighth Circuit found that a debtor facing depression and anxiety who, eight months prior to filing for Chapter 7 relief, had resigned from her position as branch manager of bank, allegedly to escape stress associated with her job and to spend more time with her 13-year-old daughter, and who was currently working only part-time, was not entitled to “undue hardship” discharge of her student loan debt. In re Kemp, 588 B.R. 226 (B.A.P. 8th Cir. 2018). The court looked at several factors including:

  • The debtor had comfortably been able to make regular monthly payments while working as branch manager of a bank.
  • The debtor failed to introduce any medical evidence of inability to work full-timeas debtor’s medical problems were capable of being treated with medication.
  • The debtor’s 13-year-old daughter would attend college in a few years and not require her financial support.
  • The debtor’s current financial difficulties appeared to be result of her voluntary choices and were not, in any event, shown to be long-term.
  • The debtor withdrew $35,000 from her retirement plan after quitting her job and paid none of it towards the student loans.

It is a common misconception that student loans are impossible to discharge in bankruptcy. However, Dequeshia Prude assisted a client in discharging over $17,000 in student loans due to financial hardship. The client faced physical and mental disabilities that affected the client’s ability to maintain steady employment. Additionally, the client had been a recipient of social security disability income on and off for the last few decades and had been declared totally and completely disabled due to physical and mental disabilities.

This case was unique because at the time of trial, the client’s loan payments were in forbearance, so there were not any payments due for the next few months. However, due to the client’s testimony and medical evidence, the court found by a preponderance of the evidence that the financial, mental, and emotional strain of the debt created a long-term undue hardship and it was unlikely the client could hold gainful employment that would allow repayment of the loans.

Contact us at The Law Group of Northwest Arkansas LLP for a free consultation on student loan dischargeability. Check back for our next blog on Rebuilding Your Credit After Bankruptcy!