Articles Posted in Student Loan Debt

A ruling recently released by the United States Bankruptcy Court for the Southern District of New York has declared that a debtor may be able to discharge debts that she incurred to support herself while studying for the bar exam. The petitioner in the case of Campbell v. Citibank had been a law student, and after graduating from law school she borrowed an additional $15,000 in “Bar Loans” from the defendant to help her pay for a bar exam review course and support herself while she studied for the exam and awaited the results. The court ruled that the Bar Loan taken out by the plaintiff was not a student loan, as interpreted under the law, and it was therefore dischargeable as if it were any other commercial loan.

law-books-291676_960_720The Latest Ruling Contradicts Rulings by Other Bankruptcy Courts

Previous rulings by other bankruptcy courts have denied bankruptcy debtors the discharge of Bar Loans without a showing of undue hardship, which is the same standard that must be met to discharge other student loan debt. The current U.S. Bankruptcy Code exempts debts incurred for an “educational benefit” from discharge, and this has commonly been interpreted to place Bar Loans and other student loans into the same category of debts that are not dischargeable through a bankruptcy proceeding.

In Campbell v. Citibank, the Court found that “the term educational benefit, as used in [the U.S. Bankruptcy Code], cannot properly be understood to include a consumer loan such as the Bar Loan.” The court went on to criticize the earlier rulings denying the discharge of Bar Loans as failing to address the most important issue, the meaning of the term “educational benefit” under the U.S. Bankruptcy Code.

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Although there are currently some methods to discharge student debt with a federal bankruptcy case, the fact remains that bankruptcy courts rarely receive requests to discharge student loans and even more rarely grant them. According to a recent Forbes report, the Department of Education has been putting considerable effort into defending the current laws governing student debt in bankruptcies.

college-1440364The Department of Education is the largest single holder of student loan debt and is likely putting so much effort into supporting the current laws because these laws are extremely favorable to holders of student loan debt. When compared to other types of debt, even potentially questionable debts like unpaid taxes, gambling losses, or unpaid child support, student loan debt continues to be one of the most difficult types of debt to discharge in bankruptcy.

Debtors With Student Loan Debt Must Be Cautious of Debt Relief Agencies that Offer Loan Rehabilitation

The Forbes report includes an interview with a student loan activist and advocate, Alan Collinge. Mr. Collinge cautions that some “debt relief agencies” and “debt counselors” have been distributing overly optimistic information concerning the likelihood of student loans being discharged in bankruptcy as a method to attract clients with student loan debt in default. The predatory companies that concern Mr. Collinge attract clients with promises of discharging student debt through bankruptcy, but they have no real intention of guiding their clients through bankruptcy.

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In a case decided earlier this month, the Seventh Circuit Court of Appeals affirmed a bankruptcy court’s decision not to allow a debtor to discharge $260,000 of student loan debt. Although student loan debt is generally not dischargeable in a bankruptcy, if a debtor can show that repaying the debts would cause an undue hardship on their life, the Court should allow the debts to be discharged in the proceeding.

graduation-1426997The debtor and appellant in Tetzlaff v. Educational Credit Management Corporation argued that as a 56-year-old unemployed man living with his mother and suffering from mental health issues, he would be unable to repay the debt and suffer undue hardship if he was unable to discharge the debts. The bankruptcy court applied the legal standard for proving undue hardship and ruled that the debtor was employable and could repay the debt it he wanted to, and the Seventh Circuit affirmed.

The Standard for Undue Hardship to Justify the Discharge of Student Loan Debts

Bankruptcy courts can and do allow the discharge of student loan debts when the debtor demonstrates that repayment would cause them undue hardship. Prior court decisions have developed a standard to decide what a debtor must prove to qualify for the undue hardship exception, which consists of three factors that must be met.

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