Student Loans in Bankruptcy

Student loans can sometime be written off in bankruptcy, but it can be quite hard to meet the necessary conditions to do so.

 

The Discharge of Student Loans

Student loans are NOT among those debts that can NEVER be “discharged”—legally, permanently written off on bankruptcy. Bankruptcy law does totally exclude certain kinds of debts from being discharged–one example is unpaid child support.

Instead student loans are among those debts that are discharged IF they meet certain conditions. They are somewhat like income taxes, which can definitely get discharged. With income taxes there is a list of conditions; with student loans there is only one to meet. Yet, discharging a student loan can be much more difficult than discharging an income tax debt. That’s because the conditions for discharging income taxes are mostly straightforward, compared to the much vaguer condition for student loans.

The Vague Condition of “Undue Hardship”

Bankruptcy law allows a student loan to be discharged if “excepting such debt from discharge… would impose an undue hardship on the debtor and the debtor’s dependents.” Section 523 (a)(8) of the U.S. Bankruptcy Code. So if you can show that your student loans are causing “undue hardship,” you can discharge those loans.

What’s “Undue Hardship”?

The problem is in figuring out what that phrase means.

In practical terms what does the statute consider a “hardship”? And what more does it take for a “hardship” to rise to the required level of an “undue” hardship?

The phrase “undue hardship” did not originate in Congress. It came from a Commission on the Bankruptcy Laws created by Congress way back in the early 1970s to help guide a total overhaul of our bankruptcy laws.

When Congress used that term in the statute on student loan discharge quoted above, it did not define it. Many other important terms used in the Bankruptcy Code are directly defined within the Bankruptcy Code. See Section 101 on “Definitions.” But not this one.

A Practical Standard for “Undue Hardship”

Congress left it to bankruptcy judges and courts of appeals to apply this term to people’s circumstances. They’ve focused on coming up with practical conditions required to have a hardship that is serious enough to be considered to be “undue.”

Over the decades most of the bankruptcy courts in the country have largely settled on three hurdles to jump for undue hardship:

1. To make the required payments on the student loan under your current income and expenses would leave you unable to maintain even a minimal standard of living.

2. This current situation of being unable to maintain a minimal standard of living is expected to continue over all or most of the repayment period of the student loan.

3. You’ve made a real effort at paying the student loan and/or qualifying for programs to address the debt responsibly.

Important Considerations

  • You must ask for a hardship discharge during your bankruptcy case or you’ll continue to owe your student loan(s). This is done through what is essentially a lawsuit in the bankruptcy court. You must convince the bankruptcy judge that you’ve jumped the above three hurdles to get a decision in your favor. 
  • The timing of your request can make all the difference. You may not qualify for undue hardship now, but you may do so in the future. An example would be if you have a worsening chronic medical condition. Talk with your bankruptcy lawyer about reopening your bankruptcy case later when you better qualify for undue hardship.
  • Consider filing a Chapter 13 “adjustment of debt” bankruptcy now if you may not qualify now but will in the next few years. You could likely not make any student loan payments for a few years. Then later in your 3-to-5-year case, or as soon as you’d qualify, you’d ask the court for an undue hardship determination, while your Chapter 13 case is still open.

Conclusion

It’s often not easy to meet all three conditions of the undue hardship standard. It can be a rather lengthy and expensive legal process. But an increasing number of people have large student loans as a major portion of their debts. If that’s you, get legal advice from an experienced and conscientious bankruptcy lawyer. The bigger your student loans, the bigger their impact on your future, and all the more important to understand your rights and options.