Can Bankruptcy Discharge Student Loans?
Discharging student loans through the federal bankruptcy court is extremely difficulty. Since 1978 Congress has increased restrictions on bankruptcy debtors seeking to discharge student loan debt. Today, nearly all student loans are dischargeable only if the debtor can prove that repaying the debt would impose an “undue hardship” on the debtor and his dependents. This standard applies to both federal student loans and private student loans, although a bill was recently introduced in Congress aimed at making it easier to discharge private student loans.
While student loans nearly always impose a hardship on a bankrupt debtor, the bankruptcy courts have interpreted the “undue hardship” standard to be an exceptionally high bar. First, the debtor must file an adversary action and have a hearing to determine whether repayment of the debt would constitute an undue hardship. At that hearing the debtor must show that: 1) the debtor cannot maintain a minimal standard of living and also repay the loan; 2) the debtor’s financial inability to repay the loan is likely to continue for a significant portion of the loan’s repayment period; and 3) the debtor has made a good faith effort to repay the loan. In one particularly harsh case out of Ohio, a bankruptcy judge told a blind debtor receiving $811 each month in social security disability that, “It remains to be seen . . . whether [the debtor] will find work or remain unemployed.” Wallace v. Educational Credit Management Corp., 2010 WL 5764771 (Bky.S.D. Ohio Dec. 1, 2010).
While discharging a student loan debt may be extremely difficult, lenders often find it equally challenging to “prove” the student loan debt during a Chapter 13 bankruptcy case. First, the lender who claims to currently own the debt may not be the original creditor on the contract. The current creditor must then prove that it has standing to collect on the loan. Second, the creditor must also demonstrate the amount owed. Financial records may be hard to produce if the loan has changed hands several times.
Even when bankruptcy cannot discharge or otherwise eliminate your student loans, it can provide some temporary relief. The automatic stay stops all collection action during the bankruptcy case and a Chapter 13 bankruptcy case provides an opportunity to make payments under court supervision. After the bankruptcy case is concluded, non-bankruptcy options are available including deferment, forbearance, loan forgiveness, and income contingent repayment plans. If you are experiencing financial difficulty and have student loans, consult with an experienced bankruptcy attorney and discover your options.