By Jeff Curl, San Mateo Bankruptcy Attorney
A colleague of mine attended a student loan webinar put on by collection companies that chase down student loan borrowers in default. He asked for an estimate of the percentage of student loans facing a discharge in bankruptcy court. In other words, How often do bankruptcy courts grant discharges of student loans?
The presenter’s response was that discharging student loans was the unicorn of the bankruptcy world.
Student loan lenders and the collection companies do not fear borrowers that declare bankruptcy because student loans are not dischargeable unless the borrower can show an “undue hardship.”
Proving an “undue hardship” first requires a debtor in bankruptcy to file an adversary proceeding to discharge student loans. An adversary proceeding is a lawsuit by the debtor/borrower against the lender.
This in itself is a barrier to entry that eliminates most borrowers from pursuing discharging student loans. The expense of pursuing a lawsuit is cost prohibitive. If you filed bankruptcy with large student loan debts in the first place, funding litigation against a bank or collection company is just not in the cards for most people.
Second, the burden on the debtor/borrower to prove that the student loan is an undue hardship is very difficult. There have been some cracks in this high burden, but the courts where we practice still are bound to follow a very strict standard.
This is not to say that there are not appropriate cases where an undue hardship exists. But when collection companies openly declare discharging student loans as the unicorn of the bankruptcy world, expect resistance and be prepared for a fight.
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