Court Case Illustrates Just How Difficult It Is For Borrowers To Discharge Student Loans In Bankruptcy

(steakpinball)

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Students being crushed under the weight of mounting student loan debt have few options when it comes to receiving forgiveness for their debts, and bankruptcy is often the least obtainable – thanks in part to the nearly impossible to meet “undue hardship” standard. To see just how difficult and seemingly arbitrary this guideline is, all one needs to do is hear about a recent federal court case out of Maryland that determined a woman couldn’t escape her debt obligation because she had failed to make a good faith effort in repaying the loans despite the fact she’s unemployed, disabled and living below the poverty line.

A federal district judge ruled this month that the 45-year-old woman could not discharge $37,400 in student debt during bankruptcy proceedings despite the fact her entire $10,000 income comes from Social Security disability benefits and public assistance, Bloomberg reports.

The woman, who hasn’t worked since 2008, initially took out student loans worth $13,250. However, over the years that debt ballooned to more than $37,000.

She initially sought to discharge the debt in bankruptcy. When a judge ruled she couldn’t skirt her obligations, she took the case to the U.S. District Court in Maryland.

It was there that a judge ruled the woman failed to meet the undue hardship test.

As we’ve previously reported, discharging student loans in bankruptcy is a long and tedious process that often provides little relief to consumers.

In order to shake student loans debt in bankruptcy court, borrowers must prove undue hardship through a court determination. That means it is entirely up to the court to decide whether a borrower meets the three-pronged standard. To make matters worse, the standard can vary a great deal, because the bankruptcy code does not provide an actual definition of undue hardship.

In general, one prong of the undue hardship standard relates to a plaintiff’s ability to prove that repaying the debt would make it impossible to “maintain, based on current income and expenses, a ‘minimal’ standard of living.”

The second prong includes proving that “additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.”

While the woman was successful in proving those two standards, the court ruled that she was incapable of proving the third: “that the debtor has made good faith efforts to repay the loans.”

According to Bloomberg, the judge found the woman failed this test because she didn’t attempt to repay her loans while holding a government-sponsored job in 2008.

However, at the time the woman was only making $11,000, just $1,000 more than her current income. She told the court she used the additional funds to pay credit card debt and other expenses.

Although the woman is currently still on the hook to pay her student debt, the district court judge provided her with information on government forgiveness programs that may be of assistance.

Courts Rule That Disabled Woman Living Below the Poverty Line Must Repay Student Loans [Bloomberg]