The Wall Street Journal recently published an article concerning bankruptcy and student loan debt that shows there may be a glimmer of hope for dischargeability of a small slice of student loan debt. As we all know, student loans are not dischargeable in bankruptcy (that means they cannot be erased or eliminated by a bankruptcy filing) unless the debtor can prove “extreme hardship.” And extreme hardship has been ruled in several court decisions to be defined in ways that make it extremely difficult for a debtor to get discharge. (Not even a blind, disabled debtor could qualify…)
Now some attorneys are attacking it from a different angle. The Code specifies that a debtor cannot discharge a loan for an “educational benefit.” Some debtors have argued — and apparently won — that this means certain loans can be canceled, for example, loans to attend schools without accreditation or loans to take the bar exam. The Bankruptcy Court in Brooklyn, NY decided that a debtor’s loan to study for the bar exam was in the nature of a consumer loan and therefore dischargeable, although the rest of her law school loans were not dischargeable. In another case, a bankruptcy court ruled that loans to attend a non-accredited foreign medical school were also dischargeable, but it should be noted in that case the school falsely represented to the debtor it was accredited.
At least there is now something for bankruptcy attorneys to think about when faced with a debtor whose debts are primarily from student loans. A fight on these lines in court, however, will likely be time consuming and expensive so all options have to be carefully weighed.