Student loans continue to remain difficult to discharge in bankruptcy

On behalf of Gregory Starkey

Fortune magazine has recently reported that several U.S. Senators have introduced a bill dubbed the Fairness for Struggling Students Act of 2015. The bill would “treat student loans issued by private banks the same as other types of private unsecured debt in bankruptcy proceedings.” The result would be to give debtors struggling to repay a private student loan a chance for a fresh financial start by making the loan dischargeable in bankruptcy.

CNN reports that tens of millions of Americans have at least one outstanding student loan. Currently, the bankruptcy laws are written in such a manner as to make it extremely difficult to discharge student loans in bankruptcy regardless of whether they are issued by private banks or by the federal government. According to the U.S. News and World Report, student loan defaults continue to rise and are becoming an increasing problem. Up to one quarter of all student loan borrowers from the last nine years have defaulted on their student loans. Moreover, approximately 37 percent have missed at least one payment on their student loan.

Not surprisingly, there are concerns that the huge number of Americans carrying student loan debt could imperil the American economy. The St. Louis Federal Reserve Bank published a study showing that, after mortgage debt, student loan debt constitutes the largest amount of debt carried by American consumers. One concern is that if young- to middle-age adults are struggling to pay down high student loans, they will delay the purchase of homes, automobiles and appliances. This would have the effect of drastically reducing the overall consumption growth needed to keep the economy on track. A fall off in consumer spending could result in a severe shock to the U.S. economy.

Eleventh Circuit cases

There is an exception to the general rule that student loans are typically not subject to discharge in bankruptcy. That exception comes into play when the failure to permit the discharge of the student loan would impose an “undue hardship” on the debtor and the debtor’s dependents.

In the case of In re Cox, the Eleventh Circuit Court of Appeals explained that a debtor seeking to discharge a student loan must show three things. First, based on current expenses and income, a minimal standard of living for the debtor and any dependents cannot be continued if the loan is repaid. Second, additional evidence indicates that there will no change in circumstances during the most of the time of the loan-repayment period. Third, the debtor has made efforts in good faith to repay the loan.

While it is difficult to discharge a student loan in bankruptcy, it is not impossible. For example, in In re Zumbro, the Eleventh Circuit upheld a bankruptcy’s court’s order discharging a student loan debt after finding that the debtor had proven that she would suffer undue hardship if the debt was not discharged.

Seek legal advice

If you are struggling to repay your student loans and provide for your families, you should contact an Alabama attorney experienced in handling bankruptcy law. While the standard for discharging a student loan is difficult to meet, it is not impossible given the right facts. Even if your student loans are not dischargeable in bankruptcy, you may have other debts that would be dischargeable thereby freeing up money to pay off your student loans.