I think most bankruptcy attorneys would agree that Student Loans are the single most difficult debt to discharge in bankruptcy.  This is because Section 523(a)(8) of the Bankruptcy Code prohibits the discharge of student loans unless the debtor can show that it imposes an “undue hardship” on the debtor and the debtor’s dependents.   Proving that such a loan imposes an undue hardship in bankruptcy court is extremely difficult and expensive, requiring the filing of an Adversary Proceeding and a bankruptcy trial.  Most applications to discharge a student loan are unsuccessful.

Recently, the Nebraska Bankruptcy Court discharged an $84,799 student loan debt owed by 45-year-old Linda Kloos, Adversary Case Number 08-8060.  Ms. Kloos earned $1,657 in take-home pay each month, and her husband received $817 in Social Security Disability income.  Both the debtor and husband suffered from ongoing medical problems including back injuries, hypertension, depression, knee problems, heart ailments, and obesity. 

Prior to filing bankruptcy, the debtor consolidated her student loans through the William D. Ford Direct Loan Program.  The loan provided for an Income Contingent Repayment Program (ICRP) over 25 years, and whatever balance not repaid at the end of the loan would be “forgiven.”  However, such debt forgiveness sometimes results in taxable income.

In reviewing this case, the Court took into consideration several factors, including:

  1. The age of the debtor.
  2. The physical and mental health of the debtor.
  3. The fact that the debtor had participated in an Income Contingent Repayment Program for almost 8 years prior to filing bankruptcy.
  4. The fact that the debtor’s income was not likely to increase in the foreseeable future.
  5. Expenses of the debtor were not likely to decline over time.
  6. The Income Contingent Repayment Program did not make a meaningful dent in the loan balance.
  7. The debtor faced a significant tax burden when the income contingent program ended.
  8. The debtors relied on charity on a monthly basis to meet basic living expenses.

The most difficult obstical to obtaining a discharge of student loans is the Income Contingent Repayment Program.  In fact, the existance of these programs makes is darn near impossible to discharge student loans in most cases since most debtors have not sought out such programs prior to filing bankruptcy.