Students Loans Discharged in Bankruptcy

The 7th Circuit has decided that a healthy, 53 year old destitute paralegal is entitled to a bankruptcy discharge of the remaining $25,000 of her education debt.

One of the reasons that schools are able to charge outrageous tuition and students are able to borrow with abandon is because, generally, student loans are non-dischargeable debt in bankruptcy proceedings -- on par with child support.

This latest opinion may work to upend the current system, although it seems unlikely.  The judges let the paralegal slide on enrolling in the Income Based Repayment or Income Contingent Repayment plans, saying that it was contrary to the purpose of bankruptcy law.

In a concurring opinion, Judge Manion wrote," [l]ike other well-educated individuals who are having a hard time finding good jobs, or work of any kind, in a tough economy, Krieger [the paralegal] should be required to enroll in the William D. Ford Income-Based Repayment Plan."

As the author of the ABA Journal article notes, "[a]bsent discretionary income, she would not be required to make any payments. And after 25 years of complying with the program, any remaining balance would be forgiven." 

It is more likely that the newer IBR and ICR plans, coupled with loan forgiveness, will be the government's answer to the student loan problem.  It is unlikely that the courts will allow sweeping discharge of student loan debt. 

ABA Journal -- 7th Circuit Oks $25K student-loan discharge for 'destitute' paralegal


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