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Student Loans in Bankruptcy
Most bankruptcy FAQs will tell you that Student Loans are not dischargeable. While this is good advice – and very likely your loans are not dischargeable, this is not technically true. The Federal bankruptcy laws do allow for relief from Student Loans. Called the “undue hardship” standard, section 523(a)(8) is usually applied very narrowly by the courts, making it nearly impossible to discharge student loans in bankruptcy – especially, it seems, in Ohio.

Consider the case of Douglas A. Wallace Jr, (Wallace v. Educational Credit Management Corp., Bky.S.D. Ohio Dec. 1, 2010), a 31-year-old graduate of Eastern Kentucky University who, one might argue, is the poster-boy for the phrase ‘undue hardship’.

Wallace asked the bankruptcy courts in Ohio’s Southern District to consider discharging his student loans because he was simply unable to pay them and was reasonably certain that he would never be able to repay them in the future.

Wallace’s misfortune began at age nine when he was diagnosed with diabetes. Though he was able to have a relatively normal childhood and was able to obtain a bachelor’s degree in 2004 (incurring student loan debt of $32,500 in doing so), that was about as far as Wallace’s body was willing to take him. He worked for one year after graduation, earning about $12,000. Starting in 2005, his diabetes caused him to gradually become blind and was forced to leave the workforce.

As if near total blindness weren’t hardship enough (Wallace could only read words that were printed with 8” high letters), his diabetes also caused him to require kidney and pancreas transplants. By 2008 he had a prosthetic right eye, was deemed legally blind, and was awarded social security disability in the amount of $811 per month. He had not been employed since the year he left college. He lived with his father and listed expenses of $790 per month in his chapter 7 petition. Interest of 2.875% had cause the student loan balance to increase to $38,000.

The bankruptcy court began by observing that the “Brunner” test, named after the case that established the standard, would be applied in determining whether the student loans were an undue hardship. This test could be met only if the debtor could show the following:

(1) That the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for [himself] and [his] dependents if forced to repay the loans;
(2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
(3) that the debtor has made good faith efforts to repay the student loans.

The court held that the first and third prongs of the Brunner test had been met, but it faltered when it came to the second prong. The court noted that the debtor had a college degree and that “his physical condition appears to have stabilized.”

The court stated in it’s decision that with regard to this blind debtor, “it remains to be seen… whether he will find work or remain unemployed.” This meant it was possible that the debtor might someday be able to make payments, and therefore the second prong of the Brunner test had not been satisfied.

The court recognized that it was reaching a harsh result, and accordingly it declined to issue a final order of non-dischargeability. Instead, it scheduled a status conference for September 5, 2012, at which time it could be determined whether the debtor’s employment had changed. In the meantime, the court ordered the debtor to pay $20 per month toward his $38,000 student loan obligations.

Long story short, unless you think you can go toe-to-toe with Doug Wallace and win a ‘Tales-of-Woe’ battle, you should probably figure that your student loans are not dischargeable.​
If you are considering filing for bankruptcy, please contact the Law Offices of David Enos for a free consultation with an Amarillo bankruptcy lawyer today (806)372-7307. 

Information on this website is based on general principles of law. They may not apply to your situation. Nothing in this article constitutes legal advice and no reliance should be placed on the legal principles set forth in this website. This is why you should personally consult with attorney David Enos about your case.
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