There are many debts that can be discharged through a bankruptcy case. Most commonly for individual consumers, credit card debt, medical bills, mortgages, old utility bills, bounced checks, and car loans, and others can be discharged. However, there are debts that are considered priority debts, and these are generally not subject to debt relief in the bankruptcy process.
Child support, alimony, most tax debts, personal injury claims caused by intoxication, criminal fines and penalties and several other debts are priority debts that are generally not subject to discharge in a bankruptcy case. While student loans are not priority debts, until very recently, the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) made it very difficult to discharge student loans through bankruptcy. In 2019, a new bill was introduced in the House of Representatives that, if passed, may make it much easier to discharge student loan debts in bankruptcy. This bill, the Student Borrower Bankruptcy Relief Act (SBBRA) would remove the 2005 BAPCPA restrictions. Until then, receiving debt relief in Marshall, MN for student loans will be difficult. If you’re considering filing for bankruptcy, Behm Law Group, Ltd. can help you work through all debts that could be discharged in your case.
Until the SBBRA passes, bankruptcy filers will only be able to discharge their federal student loan debts in their bankruptcy case if they are able to prove “undue hardship.” This requires you to actually sue the student loan lender by filing an adversary proceeding in which you request the court to discharge the student loans on the basis of undue hardship . It is your burden to prove or demonstrate factors substantiating undue hardship to the bankruptcy court.
Threshold for Undue Hardship
In Minnesota, the threshold to prove undue hardship is more favorable/lenient than in other parts of the country. The bankruptcy court may review the totality of your financial circumstances to determine if it would be an undue hardship for you to pay the student loans. To demonstrate undue hardship and possibly have your federal student loan debts discharged in your bankruptcy case, you may need to demonstrate, among other things, the following:
- You have participated in an income contingent repayment program or other repayment options presented to you by the student loan lender but those options have not been successful.
- You have reached the top of your earning potential in the job market in your area and there is little possibility for you to increase your income either in your current job or by changing your employment.
- You’ve made good faith efforts to repay the student loan prior to filing for bankruptcy.
- You are older and close to retirement and there is no realistic chance that you could fully repay the student loan before you reach retirement age.
- Retaining the student loan debt would make it extremely difficult for you to pay your reasonable and necessary monthly living expenses.
- You have some physical or mental impairment that negatively impacts your ability to remain employed or find alternate employment that would provide you with an increased income.
If the court finds evidence that all these conditions are present, it may allow you to include your federal student loans for discharge in your case. If they are included for discharge in an individual consumer case, they could be handled as follows:
- They may be discharged in full. This is most likely when undue hardship is demonstrated in a Chapter 7 liquidation case.
- They may be discharged partially. You would still be required to repay the part of your student loans that are not discharged.
- They may not be discharged at all. However, they may be restructured under lower interest rates and other more lenient terms. This outcome is most likely when undue hardship is demonstrated in a Chapter 13 reorganization case.
In any adversary proceeding you file to prove undue hardship your creditors will have a chance to fight the case. If you plan to attempt to prove undue hardship for federal student loan debt relief, it’s crucial to have the protection of a highly experienced bankruptcy attorney.