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Told You So, Discharging Student Debt Through Bankruptcy Not Easy

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By Gabriella Khorasanee, JD on July 22, 2013 10:16 AM

Last week, in the midst of the student loan interest crisis, we looked at different options for dealing with paying back student loans. Though Congress has a fix -- for now -- the burden of student loan repayment looms large over many graduates' heads. Still desperate and considering bankruptcy? Hate to say we told you so, but that's not going to happen.

In two recent cases, two different courts ruled that students could not discharge their student debts through bankruptcy. Why? It's a very high standard to overcome.

In the first case, Robert Bentley Marlow applied for bankruptcy attempting to discharge $250,000 in student debt he accumulated in obtaining both a law and master's degree. Though he passed the Tennessee bar exam in 2010, he was not admitted to the bar for previous motor vehicle and alcohol citations, and because he failed monitoring attempts through a lawyer's assistance program.

Since graduating from school, Marlow had not had steady employment and found sporadic work as a construction worker, landscaper, and even collecting scrap metal and aluminum cans. Though he received financial assistance from his family, his loan payments amounted to less than $1,000.

Judge Karen Caldwell, of the U.S. District Court of the Eastern District of Tennessee, found that Marlow did not establish that paying his loans was an undue hardship. The court noted that he was not ill or suffering from disability, was well educated, has useable job skills and has no dependents. Rather than using his time to find a job , the court stated that Marlow used all of his time filing pro se lawsuits.

In another suit, Nathan Maas sought to discharge four private loans, he took out as a student, totaling $47,000. He argued that he used the funds for living expenses, rather than education, and were not "typical educational loans." The court did not agree.

In rejecting his arguments, U.S. Bankruptcy Judge James Gregg stated: "None of the arguments raised by the Debtor are sufficient to overcome the plain language of the loan application documents, which specifically and repeatedly reference the educational nature of the loans." The court noted that Maas failed to produce any evidence indicating the loans were just for living expenses during and after graduating from law school.

That doesn't mean it's entirely impossible -- only mostly impossible. In two recent cases, student loans were discharged where (1) the Debtor was making $40,000 annually as a juvenile probation officer; and (2) the Debtor had Asperger's syndrome and making loan payments was an undue hardship.

Going the bankruptcy route is not recommended but if you are going to go down that road you should lawyer up and be ready to show real undue hardship.

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