Discharge of Student Loans Due to Hardship in Ohio
When it comes to bankruptcy, debts like spousal and child support, restitution, and criminal fines are never discharged. Income taxes can sometimes be discharged if they meet certain criteria. Student loans are treated much like income taxes and can be discharged only under strict conditions. Unlike income taxes, the rules for student debt discharge are not as clear, and an individual will have to prove “undue hardship.” This means that paying on the loan would cause extreme financial difficulty to both the person and their family.
Definition of Undue Hardship
How the bankruptcy court decides on a student loan discharge is determined by the magnitude of hardship presented by the individual. In most cases, the following three factors must be met:
– The person is unable to provide a minimal living standard for themselves or dependents if they are forced to make the loan payments
– A challenging financial circumstance that will likely continue through the loan’s repayment term (i.e. chronic medical condition)
– The person has made a good faith effort to repay the loan in the past and/or has attempted to utilize programs for management or reduction of the loan
Establishing Undue Hardship
Meeting all three of the requirements for undue hardship is often difficult. If all three are not met, the individual will still owe the student loan. The first step to obtain a discharge of the loan is filing an “adversary proceeding” during the underlying bankruptcy case. This proceeding is just like any other civil lawsuit and will determine eligibility for student loan discharge due to undue hardship. This can happen in two ways:
– During a Chapter 7 bankruptcy, the attorney will file for an adversary proceeding at some point in the three to four-month process. The creditor will typically file an answer to the complaint, and if the case proceeds to trial, the bankruptcy judge will ultimately decide if the individual meets all the requirements for undue hardship.
– In a Chapter 13 bankruptcy, the person may be able to suspend student loan payments temporarily while all their debts are being adjusted over a period of three to five years. If the individual thinks they qualify for discharge due to hardship, their attorney can file for the adversary proceeding. This is a helpful step when the person expects to lose income or experience a decline in health.
While student loans can be discharged through bankruptcy, proving undue hardship is difficult. The interpretation of laws regarding hardship is always shifting, and the results can vary between courts. Therefore it is important to get the right legal advice from the start to ensure the optimal outcome for individual circumstances.