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Is bankruptcy becoming more of an option for those dealing with student loans?

As we've discussed on our blog, those people looking to eliminate their private student loan debt in bankruptcy face a very real challenge. That's because the U.S. Bankruptcy Code dictates that no discharge can be granted for a loan made for an "educational benefit" absent a showing of undue hardship.

While it might not seem as if it would be too difficult to demonstrate undue hardship, the majority of bankruptcy courts employ a notoriously difficult standard known as the "Brunner test" to make this determination. Indeed, it's so difficult to satisfy that many professionals have come to automatically discount bankruptcy as an option when dealing with private student loan debt.

Interestingly enough, recent reports indicate that there have been multiple cases over the last several months in which bankruptcy courts have actually permitted borrowers to discharge at least some portion of their private student loans.

What makes this especially interesting is that these borrowers aren't demonstrating undue hardship, but rather advancing a new legal argument centering on the idea of loans being made for an "educational benefit."

Specifically, a few borrowers have successfully argued that some portion of their private student loans weren't actually taken out for education and, as such, there is no requirement for them to demonstrate undue hardship.

By way of example, consider a recent bankruptcy case in New York, in which the presiding judge ruled that the unpaid portion of a $15,000 loan taken out by a borrower to study for the bar exam was more like a consumer debt than a loan taken out for education, and therefore eligible for discharge without showing undue hardship.

While experts don't have firm statistics on how many borrowers have sought debt relief via this avenue, they did indicate that they expect the number to climb higher in the coming years owing to the staggering levels of student loan debt.

This is certainly a fascinating development and one worth monitoring. Indeed, it's encouraging to see that distressed student loan borrowers now have at least some hope in bankruptcy court.

What are your thoughts?      

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