Can I Discharge a Student Loan in Bankruptcy?
I’ve heard you cannot discharge student loans in bankruptcy. Is this true?
As a general rule, student loans are not discharged in bankruptcy. In other words, while the bankruptcy may relieve you of responsibility for most debts, you will still owe your student loans.
There is one important exception, however – you may discharge student loans if you can prove “undue hardship.”
What is the “undue hardship” exception?
This means something beyond financial hardship. There must be exceptional, long-term circumstances that make it unlikely that you will be able to repay the loan for a significant period of time.
For example, permanent or long-term physical or psychological disability may count as undue hardship.
In order to qualify, you generally must also prove you have made a good-faith effort to repay the loans before you filed bankruptcy.
Do these rules apply to all student loans?
These bankruptcy rules apply to all student loans which are guaranteed or subsidized by federal, state or local government. Most student loans are guaranteed or subsidized.
If I file bankruptcy, how may I qualify for the “undue hardship” discharge of student loans?
After you file bankruptcy, you must file a lawsuit in Bankruptcy Court known as an “adversary proceeding,’ against your student loan creditors and/or the government. Then, you will have to prove your case, through testimony, supporting witnesses, and documents such as financial, educational, employment and other records.
What will the Bankruptcy Court do after the evidence is presented?
The court may, of course, either grant or deny discharge. The court may also, however, consider alternatives such as- discharge of part of the debt,
- deferring payment, and
- delaying a final decision to see if conditions either improve or get worse.
Either side has the right to appeal the Bankruptcy Court’s decision to the federal court system.
Are these cases expensive?
In most cases, yes. Due to the work involved, private attorneys must normally charge a substantial fee to file an adversary case. It may also be expensive to bring expert witnesses to court. You have to carefully evaluate the costs and the likelihood of success before deciding whether to proceed with this kind of case.
Can student loans be discharged after the passage of time – say, seven years?
No – that used to be the law, but in 1998, Congress removed the “seven year” rule, so now “undue hardship” is the only ground for discharge in bankruptcy.
What if my student loans are not discharged in bankruptcy?
You will still be responsible for the student loans, even though you have discharged other debts. However, if you don’t have to pay your other debts, your student loan payments may become more manageable.
Are there other ways to get relief from student loans besides bankruptcy?
Yes – student loan lenders and agencies have programs available to provide relief from student loans burdens, such as temporary deferments (postponement) of payment, payment programs based on income, consolidation of debts, and reduction of monthly or total payments.
There is also a program of discharging student loans outside of bankruptcy, on the basis of disability or other grounds – see our separate article, Cancellation of Student Loans, for more details.
What about Chapter 13 – can it help?
In Chapter 13 bankruptcies, a person proposes a 3–5 year Plan to repay some or all debts, in monthly installments based on the person’s ability to pay. As is the case in traditional (Chapter 7) bankruptcies, Student Loans can only be discharged upon proof of undue hardship.
However, Chapter 13 plans may help you deal with your student loan obligations, even if you cannot discharge them.
Chapter 13 plans often reduce the overall monthly debt burden. While you are making Plan payments, all creditors, including student loan lenders and agencies, must stop collection of debts.
Depending on the size of your student loans and your ability to pay, the Chapter 13 Plan may pay off all or part of the student loans. If you still owe part of the student loans when the Plan is completed, payment of your student loan will resume at that time.
Why are student loans treated differently from other debts?
In the 1970's, too many people used bankruptcy as an easy way to get rid of student loans. This threatened the funding and availability of student loans for needy students. So Congress made it harder to discharge student loans in 1979, and has toughened the discharge rules several times since then.
LSC Code: 1060400
Last revised: 7-7-04
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