Student Loans

Student loans were dischargeable in bankruptcy prior to 1976. With the introduction of the US Bankruptcy Code (11 USC 101 et seq) in 1978, the ability to discharge education loans became limited. Subsequent changes in the law further narrowed the cancellation of education debt and the student loan debt has surpassed $1 trillion in the U.S.

The US Bankruptcy Code at 11 USC 523(a)(8) provides an exception to bankruptcy discharge for education loans. Generally, student loans are non-dischargeable in bankruptcy. Student loan debt will have to be paid even if filing of bankruptcy wipes away a debtor’s all other debts. Repayment of the student loan usually begins from six to nine months after the completion of the education. It cause problems if it is difficult to find work and make prompt payments. On default of nine months payment, a lender may take action to recover the whole loan at once.

However, discharge of student loans in bankruptcy can be an option in one circumstance. A student loan can be got rid of if the debtor can prove the bankruptcy court that paying them creates an “undue hardship” on the debtor and debtor’s family.

Courts use different tests to assess whether a debtor has shown an undue hardship. To prove undue hardship, a debtor has to show that, the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans. Additionally, s/he has to show that the circumstances are such that the finances are not likely to get better soon and the current state of affairs is likely to persist for a considerable period. Also, it has to be shown that the debtor has made good faith efforts to repay the loans.

To get a discharge of student loan on the basis of undue hardship, a debtor has to file a separate motion apart from filing bankruptcy. This is called an adversary proceeding and through this the debtor is asking the court to grant an exception in his/her case from the general rule that student loans cannot be discharged.

Pursuant to Chapter 13 bankruptcy, a debtor may agree to pay off  debts over three to five years. A lender cannot demand the whole loan at once and a debtor can pay the debts under a repayment plan under the supervision of the court. Even if the debtor still have the student loan payments after the Chapter 13 repayment plan ends, the bankruptcy would have wiped off other debts and it would be affordable to repay the remaining amount. The debtor may also request to discharge the remaining debt on the basis of hardship.

It is usually difficult to prove “undue hardship” unless you are physically unable to work and there is no chance of your making money. However, courts may differ in assessing undue hardship. Some courts may be more flexible or may be less flexible. It might help if a debtor makes at least a few payments to show the court that s/he made efforts to repay. Even if a debtor is once denied undue hardship claim, s/he may claim it again if there has been a change in circumstances.


Inside Student Loans