Saturday, 13 August 2011

Student Loan Discharge in Bankruptcy, not impossible, but close.


My name is Michael O’Brien and I am the editor of the Northern District of California Blog.  There I have written dozens of articles on bankruptcy and I would like to share a little bit about discharging student loans in bankruptcy.

As Amy has mentioned on her blog, there are many betters ways to deal with creditors thank bankruptcy, such as debt consolidation or debt settlement.  However, those options are not available for student loan debt because lenders can usually use wage garnishment to get the money from the debtor.  There are payment plans that are income based such as Income Based Repayment (IBR) where an individual pays a percentage of his or her income for 10 or 25 years depending on the circumstances and then the debt is discharged.  Otherwise, to get the loan discharged the debtor needs to show that payment of the loan will be “an undue hardship” of the debtor or the debtor’s family.  This is a tough trail to hike, but it isn’t impossible.

I wrote about Nancy Lewellen who had about $160,000 in student loan debt.  She never found a job after finishing law school and started a sole practice where she earned about $11,000 a year.  From her prior career as a banker, she was able to make substantial payments on a house in San Francisco.  Access Group, one of her student loan creditors, argued that the house and mortgage was way too expensive for her and that she should sell the place (to pay the creditors) and move into a studio apartment in Oakland.
That sounds a little extreme.

Ms. Lewellen argued that she should keep the place because she was able to offset a substantial amount of her mortgage with tax credits (presumably from the mortgage interest) and offering rooms to boarders.  Judge Thomas E. Carlson agreed with Ms. Lewellen, let her keep the house and discharged Access Group’s debt.  However, he determined that another student loan creditor could continue to collect from her… $73 a month.  I guess that’s better than nothing.