Bankruptcy and Student Loans

Are bankruptcy and student loans law compatible?

As a general rule, student loans are not now dischargeable under current laws. The exception to this rule relates to hardship cases. Laws for bankruptcy and student loans requires proof of hardship in what is known as an adversary proceedings. In summary, an adversary proceeding is a separate lawsuit that must be filed in addition to the original Chapter 7 or 13 cases. Adversary proceedings require a trial before the presiding judge to receive an order allowing discharge, or alternatively, require settlement of the claim with the trustee subject to court approval.

How hard is proving hardship?

Everyone filing Chapter 7 or 13 experiences a degree of financial difficulty. The courts have grown immune to claims that food budgets are compromised, bus transportation wastes too much time, and clothes need replacement. To rise to the level of legal hardship, debtors must generally prove that the debt cannot be repaid from current earning potential. The assessment of potential is quite different that actual earnings, and is based upon a judge's assessment of the best case scenario, in which salary raises, promotions and future income are all presumed in the most generous light that can be reasonably justified. Because the government (as guarantor) is the ultimate creditor, and courts are representatives of the government, courts tend to resolve all controversy in favor of themselves.