Generally, whether you are filing Chapter 7 or Chapter 13 bankruptcy, you are unable to discharge debts to the government, including taxes, court judgments and student loans. In a rare case, a bankruptcy judge wiped out $56,299 of student loan debt. The debt was an accumulation of interest and penalties on an original $16,900 loan a woman took out for an education she never completed.
Debtors in Cleveland, Tennessee and nationwide could benefit from any shift in policy that allows the discharge of student loans in addition to other unsecured debts.
The judge found the facts in the case unique and extraordinary and that differences in this case warranted a discharge of the student loan debts. The debtor is a 64-year-old woman who works on an assembly line earning $11 an hour. She recently received a layoff notice and has no prospects for a higher income. According to the bankruptcy judge, she would be forced into perpetual poverty if indefinitely haunted by a debt that will stand in the way of her fresh start.
The judge also evaluated the woman's financial choices. When she came into some money in the past, she used the money to pay for the care of her elderly parents rather than continue with her education. The judge agreed that he would have done the same thing under similar circumstances. He found no mistake, bad judgment, or immoral choice.
Bankruptcy are more commonly forced to deal with student loan debts which present conflicting policy goals. On the one hand, the courts want to grant debtors a clean slate, however, the government does not want to discourage lenders from distributing student loans for fear of bankruptcy losses.
The Bankruptcy Code does permit the discharge of student loans if the obligation poses an "undue hardship" on the borrower or dependents. In rare cases, other debtors who present a case of "undue hardship" may be able to see student loan debts dismissed.
Source: New York Law Journal, "Rare Discharge is Granted in Case of Student Loan Debt," John Kaher, July 17, 2012.