SUMMARY: Student loans can be discharged in bankruptcy only upon proof of undue hardship. The standard of evidence required is extremely high. Even where the student loan is not dischargeable, bankruptcy may help some by discharging other debt or restructuring debt, to make money available to pay the student loan.
The Research Division of the Federal Reserve Bank of St. Louis released a report that 27% of student loans in repayment status are believed to be delinquent.
Taking action to stay current on student loans is critical. Borrowers are often overwhelmed by the amount of the debt and make the problem worse by not facing it. A list of resources for reading up on non-bankruptcy options is provided below.
Student loans may be discharged in bankruptcy, but it is extremely difficult. You have to prove undue hardship. What this means is that the Court will consider a number of factors to determine whether you are able to repay the loans. The Court will look at whether:
- you are unable to maintain a “minimal” standard of living if forced to repay the loan at the present time;
- you will be able to repay the loan in the future; and
- you have made a good faith effort to repay the loan.
While you don’t have to prove that repayment of the loan would cause you and your family to live below poverty level, you have to show more than tight finances. With the new income based programs now available for repayment of federal loans, some Courts have held that you must apply for those programs, and if, you can obtain a lower payment based on the program, the loan may not be dischargeable.
Some Courts (including the Eastern District of Texas Bankruptcy Court) have permitted a partial restructuring of the student loan requiring the debtor to “fulfill at least a partial repayment of a student loan obligation” and then discharging only part of the balance where undue hardship is proven.
Regardless of whether a Chapter 13 bankruptcy or a Chapter 7 bankruptcy is filed, when a discharge is received, the discharge will not include student loan debt without a specific finding of discharge by the Court. In order to obtain a discharge of student loan debt, you have to file a lawsuit against the student loan lender (an adversary proceeding) and request that the Court discharge the student loan debt.
Even though most student loans cannot be discharged in bankruptcy, in some cases, bankruptcy may provide relief from other debts freeing up cash to pay the student loans. There are many “Income-Driven Repayment Plans” now available for federal student loans. The U.S. Department of Education offers a repayment estimator. Administrative discharge of student loans may be available if you are totally and permanently disabled. The process for administrative discharge has been streamlined for certain disabled borrowers who have an award of SSDI or SSI and veterans with a finding by the VA of unemployability due to a service connected disability.
In addition to the option of seeking discharge through bankruptcy, a disabled individual may request an administrative discharge of federal student loans with or without filing bankruptcy.
We provide additional information on student loans here.
National Student Loan Data System – To look up the details about your federal student loan.
Student Loan Borrower Assistance – website published by the National Consumer Law Center.
Consumer Financial Protection Bureau – provides information regarding repaying student loans and also receives complaints.
U.S. Department of Education’s Federal Student Aid Disability Discharge – publishes requirements and process for obtaining discharge of federal student loans due to permanent and total disability.
Your Next Step to Debt Relief
If you are struggling with debt, consult with an attorney who can give you guidance on options available to you. Each case is different and consultation with an attorney knowledgeable about the law as it applies to your particular circumstances is an important first step in resolving debt.
Read More About Bankruptcy and Debt Relief
Chapter 7 – Usually the cheapest and fastest type of bankruptcy, Chapter 7 can wipe out credit cards, medical bills, and loans.
Chapter 13 – Does everything that Chapter 7 does, but with the added benefit of being able to help catch up on past due mortgages, car payments, and taxes.
Taxes – If you owe money to the IRS, there may be several different options for you, including some non-bankruptcy options.
Student Loans – There are many solutions to student loan issues, including getting a better payment plan, curing a default, and even loan forgiveness.
Debt Lawsuit Defense – When a creditor sues you over a debt, you can respond with a defense, which may allow you to win the lawsuit.
Loan Modifications – A special agreement between you and your mortgage lender might help you with a past due mortgage loan.
Debt Library – More in-depth articles on some of the more detailed areas of bankruptcy and debt relief.