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Student Loan Considered A Special Circumstance Under Chapter 7 Bankruptcy

new york bankruptcy lawyerA bankruptcy Judge in the Western District of New York found a debtor’s non-dischargeable student loan constituted “a special circumstance” under the Bankruptcy Law. A special circumstance could overcome the statutory presumption of abuse upon filing bankruptcy. This special circumstance would allow the student loan to be discharged in bankruptcy.

Student Loans Are Generally Not Dischargeable In Bankruptcy

The Bankruptcy Abuse Prevention Consumer Protection Act of 2005 created barriers for debtors to file bankruptcy relief under Chapter 7. This law required debtors filing a Chapter 7 bankruptcy who had monthly income higher than the median income in the State to be subject to a “means test“. This means test determines if the debtor is capable of paying back at least a portion of his or her debts. In this event the debtor cannot file bankruptcy under Chapter 7. For a debtor to file Chapter 7 bankruptcy when he or she can’t meet the means test, they must show “special circumstances” that prevents the debtor from having sufficient income to allow him or her to file a Chapter 13 bankruptcy and have a repayment plan.

In the case of a debtor named Jeffrey Powell, he decided to file bankruptcy because he could not pay back his student loans and his other unsecured debts. His disposable income was $697 and the student loan obligations were $658. In his case, if the student loans were paid, he would only have $40 left for payment of all other financial obligations. The court held a surplus of such a small amount did not amount to an abuse of the Bankruptcy Act. The court found the debtor did not have an extravagant lifestyle.

Student Loans Not Dischargeable

Student loans generally are not dischargeable in either a Chapter 7 or Chapter 13 bankruptcy. Under the Bankruptcy Code, a student loan is dischargeable “if the obligation imposes an undue hardship on the borrower or the dependents.” However, the bankruptcy statute does not define the term “undue hardship”.

Bankruptcy Judges are increasingly finding if an individual files bankruptcy and the student loans are not discharged, the student loans accrue interest during the term of the filing of the bankruptcy. This conflicts with the intent of the bankruptcy statute to give the debtor a fresh start.bankruptcy assistance

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