Bankruptcy

Section 523(a)(8): Reality v. Student Loans

By Bill McLeod, Esq.

It is exceptionally difficult ? and for many, impossible ? to discharge student loans in bankruptcy. Section 523(a)(8) exempts such loans from discharge unless the debtor can show that exempting the debt from discharge will ?impose an undue hardship on the debtor and the debtor?s dependants.? This is a high burden. A May 12, 208 decision out of the Bankruptcy Court for the District of New Jersey demonstrates how high that burden is. And the facts of this case call into question the soundness of the underlying policy behind 523(a)(8).

At the time she filed her case, the debtor was collecting $951 per month in unemployment benefits along with $200 in general assistance ($124 of that is paid directly for rent in her subsidized housing). She collected $120 per monthin food stamps, and her other expenses were minimal. The debtor incurred about $6,900 student loans in furtherance of a degree as a medical lab technician. After taken a number of courses, she determined that the field was not for her and while the opinion doesn?t mention it, she presumably stopped her education.

Shortly thereafter, she was involved in a car accident. As a result of the accident, she suffered from Spinal Cervical Stenosis and received cortosteroids. Her only other treatment available is surgery, but she testified that her doctors are reluctant to operate because she?s 38 years old.

After that, she worked at a variety of low-paying jobs, making a total of just over $1,500 in payments toward the loans. She was able to make the payments because she lived with her folks at a minimal expense. She eventually obtained more gainful employment as a truck dispatcher, which enabled her to move out of her parents' house, but that only resulted in an increased strain on her finances. During this time, she sought and was granted forbearances.

Full post as published by McLeod Law Offices on May 20, 2008 (boomark / email).