Discharging Student Loans in Bankruptcy

Discharging Student Loans in Bankruptcy2019-04-16T03:48:24-07:00

There are many sad stories of people going into significant debt to finance their education. Then, they graduate and cannot find a job or get laid off. This spells potential doom if the amount of debt is too high and they cannot recover their earning power promptly.

I have many clients with significant student loan debt and it would be nice if it were easy to discharge that debt in bankruptcy along with their other unsecured debts. Unfortunately, it is not. Any attempt at discharging student loans in bankruptcy is a difficult and uphill struggle to say the least. There are numerous potential pitfalls, including the possibility that you may end up with a sufficiently larger tab then when you started.

An interesting case having to do with student loans occurred in Wisconsin recently, in In re Dustin John Busson-Sokolik, the debtor tried to discharge a student loan debt of $3,000 that he owed to the Milwaukee School of Engineering directly. The Bankruptcy court ruled against the debtor and found that the debtor owed $16,248.78 to the school, an amount that included costs and attorney fees. In the ruling, the court found that the actual use of the money that was lent to the student is not relevant, the important aspect is that the purpose of the loan was for education.

This is where the debtor and the debtor’s attorney should have chosen to cut their losses and just live with the bankruptcy court’s decision. Instead, they appealed the bankruptcy court’s decision to the district court, the district court ruled that the appeal was frivolous and not only affirmed the bankruptcy court’s ruling but extended it to $80,269 and made the debtor’s attorney jointly and severally liable for $61,249.50 of it!

The Seventh Circuit Court of Appeals later affirmed the ruling but reduced the total amount owed to $51,417.77, with the debtor’s attorney still jointly and severally liable for $30,971 of that amount.

Once again, the lesson to be learned is that sometimes it is better to cut your losses. Also, whenever you are trying to discharge a student loan debt, be very careful because you will face a potentially dangerous battle that could make your problems (and debts) worse. Make sure that you consult with a knowledgeable bankruptcy attorney who can advise you of the likelihood of success and whether it is a path you want to take.

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