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Student Loan Bankruptcy in Indiana

Student Loan Bankruptcy in Indiana seems like a “hot” topic.  My clients frequently ask, “Is there ANY way to discharge student loans in bankruptcy?”   Many student loan borrowers are very hard-pressed to repay their student loans while “just trying to make it” with lesser-than-promised salaries out there with our slow economy.    Other student loan borrowers are not active in their field of study at all and received little life-time benefit from their student loans.

Can you do a “Student-loan” bankruptcy just to get rid of seemingly (or actually) impossible to repay student loan debts?   The answer is generally, “No.”  Student loans are NOT dischargeable in bankruptcy.

But, hope for a “Student-loan” bankruptcy in Indianapolis may still exist in at least two ways:   1) Section 523(a)(8) bankruptcy forgiveness for “undue hardship” and 2) Talk in U.S. Congress that something must be done to address the student loan crisis.

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 The “Undue Hardship” Student Loan Discharge in Bankruptcy

Before you get your hopes up, when Congress changed the law in 1978 to make federally-back student loan debts fully non-dischargeable and then further expanded that in 1984 to make all student loans dischargeable, THEY MEANT IT.   Student loans were NOT to be dischargeable in bankruptcy.  Attempting to not be completely “heartless” to very extreme situations, Congress allowed a provision in the bankruptcy code in 11 USC Section 523(a)(8) to allow forgiveness of student loan debts in bankruptcy in rare, very extreme situations.

In order to discharge student loans, you need to be in a situation where your “undue hardship” will prevent you from repaying the student loans in ANY situation.  This generally means that you will likely NEVER be able to repay any substantial portion of your student loans in the future no matter what happens.  This analysis is so extreme that you usually need to have an “extreme” situation to have chance of success.  Good examples of “extreme” situations are being extensively, permanently disabled or terminally-ill.  Remember, student loans are NOT dischargeable because they have made life difficult.  Usually, more extreme situations like medical conditions, impossibility of employment, or extreme hardship on your family are required for success.

Also, remember that student loans are ONLY dischargeable if you bring separate Adversary Suits against each of your student loan creditors during the bankruptcy filing.   Your student loan creditors will have the chance to defend themselves in these discharge requests.  These are entirely separate cases from your bankruptcy, assigned with their own adversary case numbers.  You will most likely be required to testify and provide additional information during the process.  In addition, there will likely be additional fees from your attorney for bringing such an attempt: these are totally separate, somewhat time-consuming cases.  Therefore, any attempt to discharge student loan debt should likely be made only under very legitimate and needed circumstances because of the commitment required in such an endeavor.

To put it into perspective, historically only about 1.2 people out of 1000 bankruptcy filers who have student loan debts attempts an Adversarial Request to discharge their student loan debts. (based on a study in 2007 throughout bankruptcy district throughout the U.S.).    Out of this minority who attempted to discharge their student loan debts (because they believed they had qualifying circumstances), approximately 50% had their request to discharge student loan debts denied.  The other half had remedies that varied between full discharge of student loan debts to partial discharge or agreements made with the student loan borrowers to lessen the burden.

This article on Student Loan bankruptcy is not designed to discourage anyone from attempting to discharge student loan debts in bankruptcy.  If you have a legitimate undue hardship, the bankruptcy code could allow for such a discharge of student loans.  This article only wants to give realistic picture about the rarity and requirements of such a discharging of student loans.

 U.S. Congress and Washington: The Laws May Change in the Future

As the “student loan” crisis looms over our nation, talk in Congress turns to correcting the problems that non-dischargeable student loan debts have created in our nation. Senators Richard Durbin and Harry Reid have introduced bills into Congress that again would allow student loan discharges in bankruptcy.   Even though both of these Senators are Democrats, bi-partisan support to address the “student-debt crisis” could eventually allow student loans (at least in a greater amount of cases) to be discharged once again in bankruptcy.

With focus on U.S. student loan excesses and abuses increasing, it may be possible in the future that student loans may once again be dischargeable to some degree in bankruptcy.  Public policy is certainly turning against student loan practices and toward other options of providing education to young adults.   Only time will tell what changes may come . . . but at least some hope remains for a Student Loan Bankruptcy to be possible one day in Indianapolis.

~John F. Bymaster, Indianapolis Bankruptcy Attorney