The glorious rapper (and also bankruptcy filer), M.C. Hammer, knew something about things you couldn’t touch.  Unfortunately for many, one of the types of debt that can’t be touched in a bankruptcy are student loans.   After Congress amended the bankruptcy laws in 2005, almost any loan issued for an educational benefit (either governmental or private) was made non-dischargeable.  In today’s economy, this really puts a wrench in many plans, and no one is immune from some kind of lingering debt.  For example, a former law student at Thomas Jefferson School of Law in San Diego recently filed a class action complaint against the school under the premise that its post-graduation employment statistics were intentionally inflated.  This graduate states that because Thomas Jefferson reported that 80% of its students are employed after graduating, she was persuaded to choose to attend that law school over many others.

However, once she graduated in 2008, she did not have job offers flooding her doors.  Instead, she was forced to take temporary contract and document review jobs at various law firms, never able to land a full-time and permanent position.  I do not know if this student has a valid claim that her school misrepresented its employment figures, or if she was just victim of the economic downturn that hit almost every industry.  I know plenty of young lawyers that struggled to find jobs post-graduation or who had their offers at big firms rescinded.  Whatever the reason, I found it interesting that the class action complaint cited numerous times  that the members of the class were damaged because they are now forced to “repay hundreds of thousands of dollars in school loans that are nearly impossible to discharge, even in bankruptcy.” Alburda v. Thomas Jefferson School of Law.

While the statement in Alburda’s complaint may seem harsh, it is not untrue.  With the changes made to the bankruptcy law in 2005, there is very little a bankruptcy can do for an individual with large student loan debt.  If this is all of the debt that an individual has, bankruptcy is nearly worthless as an option.  The only way to discharge student loan debt via bankruptcy is to prove that the repayment of the debt causes an undue hardship for the Debtor.  And this is a very difficult thing to prove.

Undue hardship is usually determined (especially in the 9th Circuit, which Arizona is a part of) by a three-prong test.  These prongs are: 1) if the Debtor must repay the loans, he/she would not be able to maintain even a minimal standard of living; 2)circumstances exist that would cause the Debtor’s situation to persist for a significant portion of the repayment period; and 3) the Debtor has made good faith efforts to repay the loans.  In re Ertel, No. 4-99-bk-04815-JMM (Bank.Ariz 11/29/2007) (Bank.Ariz.2007) at 4.  The burden is upon the Debtor to prove each prong by a preponderance of the evidence.  In Ertel’s case, the Court found in his favor because he only had an excess of $58.00 per month after all of his necessary expenses were accounted for.  He was also fifty-two years old, and the Court did not find it likely that he would be hired beyond a minimum wage position at that stage in his life.  The important thing to note about Ertel is that proving the first prong takes more than just a showing of bad finances.  Ertel at 5.  The Debtor has to show that requiring repayment of the student loans would be truly “unconscionable.”  Id.  So, an individual cannot just go before the bankruptcy judge, and say, “hey, I pay a lot of rent, etc because I like living in the city.  I went to graduate school to be a CPA, but I don’t really want like numbers after all.  My true passion is cooking, but cooking won’t help me pay my 70K of student loans.  Can’t I get rid of these things?”  The answer would most definitely be “no, can’t touch that.”  While this may be an exaggeration, a Debtor who wants to argue dischargeability of a student loan will have to prove more than just a bad economy at play or a change in direction.

In a “can’t touch this” case, the Debtor could consider filing Chapter 13 bankruptcy.  This would at least stop the interest from accruing on the loans while he/she structures partial repayment of the loans over a three to five year period.  If that does not provide assistance, the remaining option is to contact the lender directly for programs, such as consolidation or forbearance.