Arizona Student Loans and Bankruptcy
Turn on the news these days and you will undoubtedly hear about the gloomy jobs report. Many out of work Americans, and recent high school and college graduates, are turning to higher education as an alternative to unemployment. There exists a plethora of studies that prove higher education leads to more income and a better life. As graduate school class sizes and unemployment rates increase, many Americans are left with a fantastic education, yet no job to utilize their knowledge and skills. Unfortunately, the student loan companies don’t care, and through lobbying efforts, both federal and private student loans (both unsecured debts) receive some unprecedented protection. So how are these loans treated in a Chapter 7 or Chapter 13 Bankruptcy?
Bankruptcy courts have always offered great protection against discharge of federal student loans, even though they are unsecured debts. In 2005 when the bankruptcy code changed, private student loan lenders were given the same strict protection. Student loans are unsecured debts, which generally are easily discharged in a bankruptcy, however, the protection offered to student loans makes it nearly impossible to eliminate them through a bankruptcy.
The bankruptcy courts use an “undue hardship” standard to determine if a student loan may be discharged. This means that there is a chance to discharge them through bankruptcy, but it is very difficult. The courts use the Brunner test to determine if an undue hardship exists to warrant discharge. Under Brunner, debtors must prove:
1) based on debtor’s current income and expenses, they can not maintain a “minimal” standard of living for themselves and their dependents, if required to repay student loans;
2) there are additional evidence that indicate the hardship will exist for a significant portion of the repayment period; and
3) debtor has made a good faith effort to repay the student loan. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987)
Debtors must file an adversary proceeding to the court to determine if they have an undue hardship.
In an Arizona Chapter 13 bankruptcy, the debtor’s student loan payment is stalled until the plan is complete. This allows people to repay a portion of their other debts through the Chapter 13 bankruptcy plan, discharge the rest, and resume repayment of their student loans once the Chapter 13 bankruptcy is complete.
Comments(0)