Bankruptcy Lawyer Bryan W. Stone answers the question “Can I get rid of student loans by declaring bankruptcy?”
It’s long been understood that bankruptcy protections do not apply to the vast majority of student loan debt. The decision was made years ago to shield student lending companies from loss, meaning students are often locked into a lifetime of struggling to pay mounting school-related debts. A recent case out of a bankruptcy court in New York appears to chip away at that protection, at least in one rather limited circumstance.
The case before the U.S. Bankruptcy Court in Brooklyn concerned a law school grad who tried to bankrupt the portion of her debt related to studying for and preparing to take the bar exam. Though many people may not realize it, ordinary law school loans are generally designed to pay for expenses incurred during the academic year. This can lead to trouble after graduation when the loan money has run out but work has not yet begun, with most people taking the summer after graduation to prepare for impending bar examinations. Student loan companies have moved to fill this void, offering separate bar exam loans to cover this interim period.
In this case, the woman sought to cancel the unpaid portion of her $15,000 Citibank bar study loan. The woman explained that she graduated Pace University School of Law in 2009 and went on to fail the bar exam. She was then forced to take a secretarial job with a salary less than $50,000 per year. In total, the woman has nearly $300,000 in student loan debt.
The rule when it comes to student loan debt has long been understood to be that a debtor must demonstrate undue hardship to have educational debt discharged. This is usually done by proving that you cannot maintain a minimal standard of living for yourself and your family while paying the loans and that your financial situation is likely to continue for the foreseeable future. It should be noted that even if this can be shown, courts are still very reluctant to discharge any student loan debt, which is what makes the recent ruling even more remarkable.
The judge presiding over the case, Carla Craig, held that the bar exam loan debt should not be excluded from the bankruptcy process. Instead, the bar exam loan was the product of an arm’s length transaction and should not fall into the category of student loans that are excluded from discharge in a bankruptcy filing.
Though this only represents a small portion of the woman’s total student loan debt, many see it as an important signal. The case could serve as an example for other bankruptcy courts tackling similar questions, increasing the instances where student loan debt can be canceled. Many see this as another attack against the notion that student loans are immune from bankruptcy. Legislators have been incredibly slow to act on this serious problem, allowing students to be buried with more than $1 trillion in educational debt. The hope is that the courts may be able to help bankruptcy filers in ways elected officials have so far not been. Whether this is the first of many instances of a court broadening the protection afforded by bankruptcy or simply an outlier remains to be seen. For the sake of millions of students, let’s hope it’s the former.
If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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