Discharging Student Loans

More Judges Eager To Find Ways To Let You Discharge Student Loans

Although it is still very difficult, and often impossible, to discharge student loans, times are changing, even if the change is coming ever so slowly. The greatest hope is for Congress to pass a law that permits borrowers to discharge student loans in bankruptcy if they can demonstrate that they have made good faith, reasonable efforts to repay the loan, even if they were only able to pay down only a very small percentage of the principal balance. This was roughly the standard (although the borrower had to wait at least 7 years before trying to discharge the student loan) that was used prior to 1998, when both political parties, at the urging of their special interest financial donors, made it nearly impossible to discharge student loans in bankruptcy.

Because the cost of education has escalated exponentially over the past few decades and because the value of a four-year degree has plummeted except for specific majors such as engineering, pharmacy, accounting, etc., there has been a growing consensus that Congress should reverse the draconian prohibition on discharging most student loans.

In the meantime, more and more judges have been chipping away at the edges of the student loan bankruptcy discharge prohibition that applies in all but the most extreme cases. One of the more recent developments, in 2016, has been the way some bankruptcy judges are beginning to interpret the language of the law that prevents most student loan laws from being discharged. These judges are looking at the definition of a student loan. The actual phrase “student loan” is not used. What is used is the phrase “educational benefit.” That is, the law basically says that you cannot discharge a loan made for an “educational benefit” without proving extreme hardship.

For example, Judge Carla Craig of the U.S. Bankruptcy Court in Brooklyn, N.Y., ruled that debt from a loan used to pay for a bar exam study program is similar to a consumer debt and doesn’t fall into the category of a student loan that cannot be erased in bankruptcy.

Another example is Judge Robert E. Grossman, who in April 2016 ruled in favor of a person how had borrowed $161,592 from a U.S. bank to attend a medical school in the country of Senegal. The medical school falsely stated or implied that it was accredited. It was not accredited, and the borrower had difficulty getting licensed as a medical doctor. The bankruptcy judge ruled that there was no “educational benefit” because the borrower was unable to sit for medical board exams in multiple states.

We don’t yet have a clear precedent in Arizona, but it will probably arrive soon, and maybe your case will be the one that sets the precedent. If you would like to come in for a student loan discharge analysis, please call us for a consultation.