In order to discharge a student loan in bankruptcy, a New Jersey debtor must prove that it presents an "undue hardship." Courts have ruled, however, that the undue hardship must last for a "significant portion of the repayment period" if they get a better job.

The hardship itself must be, in fact, a "persistent state of affairs." This is done by proving that additional circumstances exist indicating that the debtor's state of affairs is likely to persist for a significant portion of the repayment period of the student loans.

How Do You Prove "A Persistent State of Affairs"?

The good news is that, for federal student loans, under guidelines set forth by the U.S. Department of Education, there are objective facts that, if they apply to you, can be used to create a presumption that your situation is "persistent." They are:

  • You are 65 years old or older
  • You have a disability or chronic injury affecting your income potential
  • You have been unemployed for at least 5 of the last 10 years
  • You did not obtain the degree for which the loan was taken out
  • Your loan has been in payment status (other than an in-school deferment) for at least 10 years

You do not need all of them, but the more that apply to you the better. You are also not limited to these. You can also claim other facts relevant to a future inability to pay.

Now, these presumptions are "rebuttable," which means that the government can challenge them, but the guidelines instruct the U.S. attorneys representing the Department of Education that this should be uncommon and "must be based on concrete factual circumstances."

Also bear in mind that these guidelines don't change the bankruptcy code; they merely advise the U.S. attorneys on what they should accept for settlement purposes. If they still fight you, these guidelines cannot be used to compel a judge to rule in your favor.

But What About Non-Federal Loans?

This still needs to be proven in order to discharge a student loan, but these guidelines and "rebuttable presumptions" are not available for non-federal loans. It is still the "wild west" of litigation to try to prove this to a bankruptcy judge in the face of opposition from tthe lender. Here are some decisions from the past.

Are You Underemployed?

In one case, the debtor was a pastor of a small church making less than $10,000 a year. However, he held a bachelor's and master's degree, and had previously worked as a salesman and audio engineer at a much higher income. The court stated that the debtor's

"choice to work as a pastor of a small start-up church cannot excuse his failure to supplement his income so that he can meet knowingly and voluntarily incurred financial obligations. By education and experience, he qualifies for higher paying work and is obligated to seek work that would allow debt repayment before he can claim undue hardship."

Have You Earned More in the Past?

In another case the debtor was over 40, was the single parent of a seven-year-old, and was self-employed as a decorative painter. However, she had an associate's degree in tourism as well as a real estate license, and in the past, she had had higher paying jobs (e.g. restaurant manager of the Queen Mary in Long Branch, CA).

The court ruled against her dischargeability action, noting that having a low paying job "does not in itself provide undue hardship, especially where the debtor is satisfied with the job, has not actively sought higher-paying employment, and has earned a larger income in previous jobs."

So What Do I Do?

Outstanding student loans continue to be a real problem for many New Jersey residents. If you live here in southern New Jersey, have a student loan that you cannot repay, you believe you meet the standards for "undue hardship," and you are ready to take action on a bankruptcy, then click here to schedule an initial, no obligation call with my office to discuss your options.

If you have more questions about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.

If you would like more information about student loans and options other than bankruptcy to resolve them, you can download my free book, I Graduated; Now What? A Guide to Dealing with Your Student Loans.

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Steven J. Richardson
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Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.