Monday, June 16, 2014

Discharging Student Loans is an Uphill Battle in Oregon

Generally speaking, student loans, both private and federal, are not dischargeable in bankruptcy. While every rule has an exception, debtors are unlikely to meet the requirements of that exception in the 9th Judicial Circuit, which includes Oregon and Washington. Unfortunately for many suffering from insurmountable student loan debt, it will require extreme circumstances, or an act of Congress and/or the Supreme Court to change the current laws on student loan dischargeability.
Most people with insurmountable student loan debt will look for any hope of dischargeability, but when we say that discharging student loan debt requires extreme circumstances, we mean it! The following case is an example of a person suffering from addiction recovery, extremely low income, and insurmountable student loan debt, and the Bankruptcy Court determined that the debtor had an ability to repay the student loans:

Debtor suffered from substance abuse for over 10 years before finally seeking rehabilitation. Debtor filed for Chapter 7 Bankruptcy in 2010, and filed an adversary proceeding seeking a determination from the Bankruptcy Court that his student loans were dischargeable, in whole or in part. Before filing bankruptcy the Debtor consolidated his loans, and made eight monthly payments of $230 on his $25,000 consolidated loan. Debtor also indicated in his bankruptcy budget that that he was paying, and could afford the $230/month payments. Debtor earned $9.00/hour working at a gas station. The Bankruptcy Court determined that the Debtor had an ability to pay his student loans under the Income Contingent Repayment Plan, and it would not be an undue hardship for him to continue paying. Carter v Department of Education, Adversary No. 10-3136.

While there have been people who were able to discharge their student loan debt, at least in part, it is a rare occurrence. To discharge student loan debt, a person must file a separate adversary proceeding to obtain a determination from the court that the debtor does not have an ability to pay the student loans.  As illustrated by the above case, this is an extremely difficult standard to meet. Additionally, an adversary proceeding is a separate trial from the bankruptcy itself, and is very expensive to try. Given the expense of an adversary proceeding, and unlikelihood of success, it is best to assume that student loans are not dischargeable.
Although student loans are generally not dischargeable, that does not mean debtors with large amounts of student loan debt are without hope. Filing for bankruptcy to discharge other debt can free up additional funds to make payments on student loans. Also, filing Chapter 13 Bankruptcy can buy debtors time to gain a more stable financial situation, by forcing creditors into a repayment plan for 5 years, paying off certain debts, and discharging other unsecured debts. The student loans will not be discharged, but the student loan creditors are prohibited from collection efforts while the debtor is in Chapter 13.
Lastly, there are government programs available for federal student loan that offer affordable repayment options. These government programs include Income Contingent Repayment, Income Based Repayment, and Pay as You Earn for loans and individuals who qualify. These options are easy enough for any person to figure out on their own, so do not get tricked into signing up for a student loan company who says they can help you obtain this programs or discharge loans. Debtors can sign up for these programs after filing bankruptcy.

If you decide you could be benefit by filing bankruptcy to free up money to pay student loans, or simply want to buy yourself some time, contact us at 503-352-3690