DISCHARGABILITY OF STUDENT LOANS IN BANKRUPTCY

In an average bankruptcy case, regardless of the chapter (7,13) filed, student loans are not dischargeable.  In the Western District of Texas, payments on student loans may not be included in a Chapter 13 Plan unless such plan proposes to pay the unsecured creditors 100% of their claims.  Instead, student loans are deferred until after the Chapter 13 plan has been completed. All the while interest is accruing on these loans. 
There are possibilities that present opportunities to discharge student loans, as set forth below: 
 1. The opportunity to discharge a student loan is to determine whether or not the loan made is actually a student loan.  The provisions of the bankruptcy code dealing with student loans are very specific, although very broad as to what constitutes a student loan that is non-dischargeable.  Therefore, each loan must be examined to determine whether or not the loan is of a type that falls within the definition of the statute.  If it does not, then the loan is dischargeable like any other unsecured claim.
 2. The opportunity to discharge a student loan is set forth in the statute and reads in part "unless accepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for..."  The burden of proof a debtor must overcome is very high but not impossible.  What constitutes "undue hardship" is in fact driven and therefore is dependent on the facts in each case.
 3. A potential opportunity that is presented is more complex and deals with the situation where a loan was made but the educational institution failed to furnish that which was promised at the time the loan was made.  An example of this type of situation is where an educational institution failed before the institution furnished or completed the course(s) and the student was unable to transfer all or any portion of the credits that would have been received to a second institution.  Whether or not this type of situation would allow the loans to be discharged would in all probability depend on the relationship between the financial institution making the loan and the educational facility.
All of the above is complicated by a case decided by the Supreme Court commonly referred to as "Seminole".  The case limits the Bankruptcy Court's jurisdiction to decide certain issues if they only involve States rights.  Therefore, if the student loan referred to is made by a state institution and does not involve any federal institutions, the court may not have the power to hear and determine any of the above.