There is a common misconception in our country that it is impossible to discharge or reduce student loans through bankruptcy. Not only are courts becoming more lenient towards borrowers seeking undue hardship, there are other mechanisms in bankruptcy law that can offer relief on student loans under the right circumstances.
Adversary proceedings are lawsuits filed against creditors, trustees or borrowers within a bankruptcy case. Student loan borrowers have successfully filed adversary proceedings against creditors by alleging undue hardship. In some cases, private lenders will forgive or reduce student loans owed (we will explain why in a moment).
In an article in the Huffington Post, two parents who had used loans to put their children through college discussed how they were able to reduce a balance of $254,000 to $80,000. According to the article, the couple filed an adversary proceeding after filing for bankruptcy, and immediately received a $30,000 discharge from Sallie Mae. With $224,000 left to go, the father responsible for the loans was determined to discharge the remaining balance. Shortly before the adversary trial, the man received a call from his creditors offering to settle all 15 loans for $80,000 at $195 a month with 0 percent interest.
Why Adversary Proceedings Work
Don’t make the mistake of assuming the couple in this story set out to “game the system.” Both parents are unemployed and one is medically retired from the U.S. Air Force due to a brain tumor. The only income both parents receive comes from disability payments. It would be unreasonable and unjust to assume they could afford regular payments on $224,000 worth of loans with capitalized interest continuously accumulating.
Why did Sallie Mae cave and offer such a generous repayment plan? It was possible Sallie Mae would lose the adversary proceeding, and it was less risky to settle with the borrowers.
The couple mentioned in the Huffington Post article are not alone, and others have used adversary proceedings to reduce student loan debts. The Sader Law Firm was successful in helping a former graduate reduce her $400,873 in student loans to $150,000. Continue following The Sader Law Firm for future updates that debunk the myth student loans cannot be discharged or reduced in bankruptcy.