This is a question I hear more and more often from potential clients as the reality of the student loan burden really hits home. The short answer is yes you can. The reality is that it is almost impossible and can cost a great deal of money.
Generally speaking, student loan debt is non-dischargeable under the bankruptcy code under Section 523(a)(8) unless a Debtor can prove that not discharging the debt would impose an “undue hardship” on the Debtor or the Debtor's dependents. This prohibition covers just about every conceivable student loan taken by a Debtor. So what makes this hard and why does it cost so much?
Let us start with the second question, why does it cost so much? Because this is a non-dischargeable debt absent proof of the undue hardship, it requires what is called an adversary proceeding to ask the Court to discharge the debt. I often describe adversary proceedings as civil cases inside your bankruptcy case. In addition, adversary proceedings are usually not part of your flat fee bankruptcy fee and are usually billed hourly at the attorney's prevailing hourly rate. This is usually going to be something above $200 per hour.
While an adversary proceeding is a separate case before the bankruptcy court it tends to run at the same time as your other case, although it may last long past your discharge. Generally the adversary is before the same judge that was assigned to your bankruptcy case and generally must be filed no later than 60 days after your meeting of creditors.
An adversary, like any other civil lawsuit, is started by filing a complaint in the bankruptcy court. The Complaint will generally list the Debtor as the Plaintiff and the Student Loan Company as the Defendant. It is generally a good idea to list the holder of the student loan note, the guarantor of the loan, and the servicer of the loan. In some case one company will be all three of these things but very rarely. A summons will issue from the Court for each named Defendant and is served, by the Debtor, on the defendants. Usually this is done by certified mail, return receipt requested. There are special service rules for banks and most financial institutions under the Bankruptcy Rules. Generally, the complaint is simply going to allege facts and circumstances that you believe establish an undue hardship for not discharging the debt.
Once the lender/servicer answers the complaint the Court will generally issue a scheduling order setting out deadlines for discovery and other case relevant events. In addition, there is usually a scheduling conference where the parties will eventually pick a trial date. With these types of complaints, the Debtor must prove the undue hardship to the Court by testimony and exhibits. The case will then progress through discovery including document requests, interrogatories, and depositions. Eventually the day of trial will come and these trials can last anywhere from a couple of hours to a full day. As you can see, there is a lot of time involved in these cases, not to mention fees like records and copying fees. You can see that paying by the hour will generate a very expensive experience. This of course is just the trial phase of this effort. If the lender losses you can almost count on the lender appealing the decision to the next Court level for review. Appeals are generally not covered in bankruptcy or adversary case fee agreements.
Now on to the second question. I am only going to touch on this briefly because over the next three weeks I am gong to examine each of the three elements of the undue hardship analysis in more depth. Title 11, the Bankruptcy Code, does not define what an undue hardship is. As a consequence, courts have developed what an undue hardship is and how a Debtor proves an undue hardship. Generally speaking, to sustain your burden as a debtor seeking to discharge student loan debt you must prove to the Court by preponderance of the evidence:
1) That you cannot maintain, based on current income and expenses, a minimal standard of living for yourself and your dependents if forced to repay your 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 your student loans; and
3) That you have made good faith efforts to repay your student loan debt to date.
While on their face these factors seem easy to prove for a Debtor they are not. In fact, the Fourth Circuit has stated that “debtors seeking to discharge their student loans bear the burden of proving that they are ‘in the limited class of debtors for which § 523(a)(8) meant to allow discharge.'”
Next week I will address some of the issues related to item one, the minimal standard of living prong.