Most debtors will not be able to discharge (wipe out) student loans in bankruptcy in New Jersey.  Discharging student loan debt in either NJ Chapter 7 or NJ Chapter 13 bankruptcy is expressly prohibited in §523 of the Bankruptcy Code. However, there is an exception.  If a debtor can show the student loans present an “undue hardship” on his/her finances, those student loans can be discharged in bankruptcy in New Jersey.

Defining Undue Hardship for Purposes of Discharging Student Loans in Bankruptcy NJ

  • 523(a)(8) provides: a discharge under . . . this title does not discharge an individual debtor from any debt unless excepting such debt rom discharge would impose an under hardship on the debtor and the debtor’s dependents, for

(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loans, as defined in . . . the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

This provision specifically restricts student loan dischargeability under the Bankruptcy Code.  The legislative intent is to prevent debtors from abusing the educational loan programs by declaring bankruptcy immediately after graduation.  §523(a)(8)

Of course, potential abuse exists throughout the bankruptcy system, not just with student loans.  So the intent of this provision is debatable.  Why would unsecured debts such as running up credit cards to travel or buy luxury items be dischargeable but someone who uses the money to better him/herself through education shouldn’t be afforded the same protection?

Regardless, to discharge a student loan, debtors must show it would be an undue hardship for you to continue repayment.

The test for determining undue hardship places the burden of proof on debtors to show:

  1. He/she cannot, based upon current income and expenses, maintain a minimal standard of living for him/herself and his or her dependents if forced to repay the student loans;
  2. That additional circumstances exist that maintain the situation is likely to persist for a large portion of the repayment period; and
  3. The debtor had made ‘good faith efforts” to repay the loans. (Brunner Test)

Also, many courts look at the undue hardship test as all or nothing—either you qualify to get the whole loan discharged, or you don’t. Other courts have discharged a portion of a debtor’s student loan.

Discharge Your Student Loan in Bankruptcy NJ Procedure

Rule 7001(6) of the Federal Rules of Bankruptcy Procedure requires debtors to file an adversarial proceeding when attempting to discharge a student loan.  During the proceeding, the burden is on the debtor to prove the “undue hardship” standard.

During the proceeding, the debtor presents evidence to show that repayment causes an undue hardship.  How does the debtor show this?  Most likely a vocational expert will testify about your earning capacity.  This testimony, along with current income and expenses can show the shortfall.  Then, it is up to the Judge to make the decision.

Other Considerations – Finding a Bankruptcy Attorney NJ

Discharging student loan debt is a tricky field.  Not all loans are created equal and many loans used for education do NOT qualify as “student loans” for purposes of the exclusion in bankruptcy.

For these reasons, you should contact an experienced NJ bankruptcy attorney to look at your specific circumstances.

If you are having trouble meeting your basic needs because of oppressive student loans, give us a call and schedule a consultation.  We are here to help and are at your service.