Student loan debts remain difficult to discharge in bankruptcy

Bloomberg News has recently noted that some financial experts feel that outstanding student loans pose a distinct threat to the American economy similar to the housing bubble that helped fuel the Great Recession. Although the economy now appears to be relatively robust, student loan balances are rising to record levels even as many American families are successfully reducing their overall borrowing. Moreover, student loan delinquencies are on the rise even as mortgage, credit card and automobile debt have all declined from their peaks. Some 41 million Americans, according to the Huffington Post, carry student loan indebtedness.

Unfortunately, given that student loans are extremely difficult to discharge in bankruptcy, the student loan problem is anticipated to only get worse over time. Since the federal government is the source and backer for most student loans, this raises the specter of significant losses to the government, and to American taxpayers, should increasing numbers of people become unable to repay their student loans and end up going into default.

Most people tend to believe that the student loan debt problem is a financial problem limited to relatively young people. However, as reported by CNN, senior citizens owe some $18 billion in student loan debts. Thus, at a time when senior citizens should be putting the finishing touches on getting their finances in order for retirement, they are "drowning in student loan debt." A woman approaching the retirement age, and who is saddled with $152,000 in student loans, testified before a congressional committee that she was resigned to being indebted for the remainder of her life. She also remarked that it was ironic that she incurred the student loan debt in order to improve her life. Instead, as she testified, it proved to be her financial undoing.

The Sixth Circuit

In a case decided just last year called In re Trudel, the Sixth Circuit Court of Appeals made it clear once again that discharging student loan debt in bankruptcy is specifically designed to be both difficult and relatively rare. In the Trudel case, a 55-year-old woman with significant health problems tried to discharge her student loan debt of over $129,000 in federal bankruptcy.

The Sixth Circuit remarked that the Bankruptcy Code is "especially exacting" regarding repaying student loans made, insured or guaranteed by the government. Continuing, the court remarked that the Bankruptcy Code renders student loan debt nondischargeable unless leaving the debt undischarged would be an undue hardship on the debtor or the debtor's dependents.

Although the debtor did suffer from medical adversity, the court emphasized that the mere existence of a medical condition, no matter how severe, was insufficient by itself to form the basis of an undue hardship discharge. According to the court, to warrant a bankruptcy discharge, the circumstances must indicate a certainty of "hopelessness" to ever repay the debt as opposed to a present inability to fulfill a financial commitment.

Seeking legal help

If you are laboring under a heavy student loan debt, you should contact a Tennessee attorney experienced in handling bankruptcy cases. Although discharging a student loan in bankruptcy is very difficult, the undue hardship test is not impossible to meet. Importantly, even if the student loan proves not to be dischargeable, a bankruptcy which would allow you to discharge other debts, such as credit card debts or health care debts, could put you in a better position to pay off your student loans.