As you probably know, discharging student loans in bankruptcy is very difficult. Bankruptcy reform legislation enacted in 2005 created a very high standard that a borrower would have to meet in order to get student loans discharged, and bankruptcy courts have been tough on borrowers trying to show that they meet this standard.
A new decision issued by the 7th Circuit Court of Appeals could potentially change this. In Krieger v. Educational Credit Management Corporation, the court upheld a bankruptcy judge’s decision to allow a borrower to discharge $25,000 of federal student loans in bankruptcy. The court concluded that the borrower, a 53 year-old paralegal, had made reasonable good-faith attempts to repay the loan. The court also noted that she was destitute, lived in a rural area and had difficulty finding suitable employment, was a caregiver for her elderly mother, and lacked the resources to look for suitable work elsewhere (no internet, unreliable transportation). The court concluded that the bankruptcy judge had discretion to determine whether the borrower met the “undue hardship” standard, and that this standard should not serve as a blanket prohibition on discharging student loans in bankruptcy.
This is a potentially groundbreaking case because it sets a precedent for discharging student loans in bankruptcy, despite the high standard. It also affirms that bankruptcy judges have discretion to determine whether the borrower has met the undue hardship standard, and that the standard is not intended as a broad prohibition of discharging student loans in bankruptcy. We’ll see where this goes, but this is definitely a good case for student loan borrowers.