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Discharging Student Loans in Bankruptcy: What Does "Undue Hardship" Mean?

In recent years, college costs have been rising steadily, and more and more students have had to take out student loans in order to cover them. At the same time, the struggling economy has made it difficult for those same students to find jobs upon graduation, or jobs that pay them well enough to manage living expenses plus student loan payments.

Many people have found themselves in such a tight financial spot that bankruptcy looks like the only way out. But whether they choose a Chapter 7 or Chapter 13 bankruptcy, the United States Bankruptcy Code places one huge roadblock in their way: student loans cannot be discharged in bankruptcy, except in the very narrow circumstances of "undue hardship." 

"Undue Hardship" and the "Totality of the Circumstances"

If you're one of those people in the position of considering bankruptcy, your situation undoubtedly feels like undue hardship already. However, that phrase has a very specific meaning in bankruptcy circles.

Section 523(a)(8)(B) of the United States Bankruptcy Code provides that an educational loan is not dischargeable in bankruptcy unless “excepting such debt from discharge will impose an undue hardship on the debtor and the debtor's dependents.”  Unfortunately, the Bankruptcy Code does not define "undue hardship," and federal courts have struggled with its meaning. 

Some courts have applied a three-pronged test for undue hardship. If a debtor does not meet all three criteria, there is no finding of undue hardship, and the loan cannot be discharged. Fortunately for Minnesota debtors, a somewhat less restrictive analysis is applied. Minnesota is located in the Eight Circuit, which identified its approach to identifying "undue hardship" in the case of Long v. ECMC (In re Long), 322 F.3d 549, 554 (8th Cir., 2002). This analysis is based on the totality of the debtor's circumstances. 

In Long, the court stated:

In evaluating the totality-of-the-circumstances, our bankruptcy reviewing courts should consider:  (1) the debtor's past, present, and reasonably reliable future financial resources;  (2) a calculation of the debtor's and her dependent's reasonable necessary living expenses;  and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case... Simply put, if the debtor's reasonable future financial resources will sufficiently cover payment of the student loan debt--while still allowing for a minimal standard of living--then the debt should not be discharged.

This approach allows bankruptcy courts to examine each claim of undue hardship based on the unique facts and circumstances of that particular case. The Long court noted that special consideration would have to be given to the debtor's present employment and financial situation, as well as the prospect of future changes to that situation, whether positive or negative. 

Pursuing a Claim of Undue Hardship

The bankruptcy court will not automatically look into whether your situation constitutes undue hardship. You, or your attorney if you have one, must file a petition to start an "adversary proceeding" for the court to make the determination. If the court does make a finding of undue hardship, though, your entire student loan debt will be discharged.

If you are struggling to meet your expenses and to repay your student loans, you may have options that will give you some breathing room. To explore them, please contact Running Law Firm to set up your free consultation to see how we can help.

Categories: Student Loans