Monday, September 25, 2006

ARE STUDENT LOANS DISCHARGEABLE IN BANKRUPTCY?

Subject: Bankruptcy Update Are Student Loans dischargeable?

Many clients have asked if student loans are dischargeable. This is a difficult issue because generally they are not dischargeable. A few years back the rule used to be that if the debt was greater than 7 years old, they were dischargeable. That is no longer the case. Now, one must satisfy three criteria to prove hardship. A 1998 case, In re Lebovits v. Chase Manhattan 223 BR 265 (Bkrtcy E.D.N.Y. 1998) , held that the debtor has the burden of providing each prong of the three-prong test established in Brunner v. NY Higher Education Services Corp 831 BR 395.

For a student loan to be dischargeable the debtor must show:

1. Inability to maintain a minimum standard of living.

2. These circumstances will persist for a significant portion of the repayment period.

3. The debtor made a good faith effort to repay loan.


Briefly, we will review each of these requirements to determine ones eligibility:

1. A minimum standard of living is defined as more than a showing of tight finances, however, it does not require the debtor to prove that he/she lives at the poverty level. The Debtor must demonstrate that he/she will not be able to maintain a "minimum" standard of living if forced to repay the loans. For example, in Lebovits v. Chase Manhattan Bank, the Lebovits' were able to satisfy their burden of demonstrating that they could not afford to repay their student loans while maintaining even a minimal standard of living for themselves and their dependants.

2. To determine that ones circumstances will persist for a significant portion of the repayment period, one must satisfy their burden by demonstrating that additional circumstances exist indicating that the state of affairs is likely to persist for a significant period of time covering the loan repayment period. In Lebovits v. Chase Manhattan Bank, the Lebovits' were able to satisfy this criteria by demonstrating the ages of their children and that as their young children got older, their financial burden would most likely become even more onerous.

3. Lastly, to determine ones good faith effort, one must demonstrate they have made attempts to satisfy their loan commitment and have made payments to the lender, despite undue hardship. One must show how you have attempted to maximize income and minimize expenses. In the Lebovits case, the mere fact that the debtors had made only three payments on their loans prior to filing for bankruptcy relief, was enough to satisfy the good faith effort despite their financial hardship.

We would be happy to assist clients in determining whether their student loans are dischargeable. Jim

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