Hope for students? Judge grants rare student loan discharge

Bankruptcy can do wonders for individuals drowning in debt they know they will never be able to pay back. It can provide them with piece of mind and a fresh clean financial start.

However, not all debt can be erased. Current bankruptcy laws do not allow those drowning in student loans to discharge their debt unless considerable circumstances warrant the discharge. And, many judges are strict on awarding discharges in even these circumstances.

However, one student made recent headlines when a Court of Appeals judge granted his student loan discharge. The case offers hope to other students perpetually strapped in student loan debt that, albeit rare, student loans can and do get erased.

The case

The case in point involves a law school graduate who had $85,000 in outstanding student loans. Although he made an annual salary of $40,000, he didn't earn enough money to make monthly payments on his student loans and support his family on a basic standard of living.

In 2003, he sought relief and filed for bankruptcy. The judge allowed him to discharge $53,000 of his student loans stating that he met the circumstances to warrant a discharge. One of his lenders appealed the decision.

The case, now over a decade later, found its way in front of the Ninth Circuit Appellate Court. The court affirmed the discharge.

The court's reasoning

Generally, considerable circumstances must exist before a debtor will be granted a student loan discharge in a bankruptcy proceeding. To determine this, bankruptcy judges examine a number of factors including whether a debtor:

• Earns enough money to repay the loan AND maintain a minimal standard of living
• Is likely to earn substantially more earnings in the future
• Has made a good faith effort to repay the loan

The court indicated that the debtor met all of these factors in affirming the judgment.

His salary was far below the medium income for his family size so paying the loans and supporting his family on a basic standard concurrently was unachievable. Further, although he completed law school, the debtor never passed the bar exam which would've increased his chances of earning more money in the future. The debtor also attempted to negotiate an affordable repayment plan with the lender but was denied.

Increased awareness for student loan debtors?

It remains to be seen whether this story will be compelling enough to help convince other judges in all areas of the country to allow discharges for individuals in similar circumstances.

However, as student loans continue to rise and the economy isn't able to prosper because future consumers saddled with student loan debt will be unable to contribute to the growth of the economy, Congress and the President will no longer be able to sit back and do nothing.