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Discharge Of Student Loan In Chapter 13: One Debtor Got Away With It

By Jonathan Alper

Generally speaking it is difficult, almost impossible, to discharge a student loan in bankruptcy. The debtor has to show ?undue hardship?, and if you are physically able to go to work you will have difficulty showing undue hardship. Except that a few years ago one Arizona debtor was able to discharge part of his student loans in a Chapter 13 case.

Here?s what happened. The debtor put his student loan in a five year Chapter 13 plan. The student loan lender received notice of the plan in the normal course of the bankruptcy. The student loan lender did not object to the plan. After the debtor completed his Chapter 13 and the court issued a discharge order the student loan lender went after the debtor?s income tax refunds to collect the student loan. The creditor claimed that the debtor could not discharge any part of the student loan unless he filed a separate adversary complaint within the bankruptcy proceeding alleging undue hardship.

The bankruptcy court said the balance of the debtor?s student loan was discharged even though the debtor neither claimed nor proved undue hardship in the bankruptcy case. The court said that the lender cannot collect the student loan after the Chapter 13 discharge because the lender had proper notice and never objected to the debtor?s plan.

Although you cannot assume your student loan lender will similarly fail to scrutinize your own Chapter 13 plan, this case suggests that it may make sense to include student loans in a Chapter 13 plan. The same result will not apply to Chapter 7 where creditors with non-dischargeable loans do not have to intervene in order to protect their rights after the Chapter 7 discharge. See, 553 F 3d 1193

Full post as published by Florida Bankruptcy Law on October 07, 2010 (boomark / email).