Is Discharging a Student Loan Possible in Bankruptcy?

Posted by Kevin on June 8, 2012 under Bankruptcy Blog | Be the First to Comment

What does it take to write-off a student loan in bankruptcy? An “undue hardship.” And that is a very tough standard to meet.

When the 1978 Code was enacted, you could discharge a student loan 5 years after the first payment was due or for undue hardship.  By 1990, there was an outcry that the 5 year rule was too lenient.  It was increased to 7 years.  I remember that what would drive the judges crazy when, say, a  medical student, usually during his or her residency, would file a Chapter 7 and wipe out $200,000 of student loan debt, and then afterward pull in the big bucks.  Admittedly, this was egregious.  By the mid-90’s, there was talk that the time period would be increased to 10 years.  But Congress, through the Higher Education Amendments of 1998, decided to do away with the time element for discharge of student loans.  The Bankruptcy Code incorporated this amendment.  So, since 1998, undue hardship to the debtor and the debtor’s dependents is the only way to discharge a student loan.

Undue Hardship is not defined in the Code.  That means that the bankruptcy courts were required to decide, on a case by case basis,  what undue hardship means.  There have been hundreds of decisions relating to what constitutes an undue hardship.  Although there are some differences among regions of the country, the general consensus that to meet this “undue hardship” hurdle, you have to show that you meet three conditions:

1. Under your current income and expenses, if you were required to repay the student loan, you would be unable to maintain even a minimal standard of living.

2. This inability to maintain a minimal standard of living while repaying the student loan would likely stretch out over all or most of the loan repayment period.

3. You had made a meaningful effort at repaying the loan, or to qualify for appropriate forbearances, consolidations, and administrative payment-reduction programs.

The bottomline is that very few debtors will be able to get a student loan discharged. That means that even if you file bankruptcy, you will be required to pay off the student loan- no matter how long it takes.  Moreover, unlike some debts in which the burden is on the creditor to challenge the discharge of the debt, with a student loan the burden is on the borrower to establish “undue hardship” during the bankruptcy case.  Otherwise, no discharge and the debt survives your bankruptcy case.  As we said in the opening- a very tough standard.