Discharging Student Loans in Bankruptcy

The Sixth Circuit Court of Appeals issued a ruling earlier this week regarding the dischargeability of a student loan in bankruptcy for "undue hardship." In this case, the debtor took out student loans to help pay for college education. He later became pastor of his own church. At the time of the bankruptcy, the debtor's annual income was less than $10 thousand, far below the poverty level for a family of five. He sought to discharge the student loan obligations in bankruptcy claiming that repayment of the student loans would constitute an undue hardship for him given his income and other financial circumstances. The trial court agreed with him, but the lender appealed.

The Court of Appeals reversed, holding that his financial situation did not constitute an "undue hardship" for him or his dependents. The Court ruled that there were not circumstances beyond the debtor's control which give rise to "a certainty of hopelessness," not just a present inability to pay. The Court explained that the debtor voluntarily chose his work - preaching - but was capable by education and training of earning much more. The Court stated that the debtor is obliged to seek such work before he can claim "undue hardship."

For you debtors out there with student loans, it takes more than just lack of employment to establish "undue hardship" such that the student loan will be discharged in bankruptcy. Such factors include illness, disability, lack of usable job skills, or the existence of a large number of dependents.

Student loans, like taxes, are extremely difficult to discharge in bankruptcy. The Court of Appeals' opinion in this case illustrates just how so.

The case: In re Michael Oyler, (CA 6 2005) Docket #: 2003-4505.