How It is Possible to Discharge Student Loans in Bankruptcy

As recently as 1998, it was much easier to discharge student loans in bankruptcy than it is today. The law changed that year, representing a policy of discouraging discharge of student loans. Congress felt that too many students were taking advantage of bankruptcy, and consequently were harming the student loan program itself.

While it currently is very difficult to do so, it is still possible to discharge student loans in bankruptcy. The attorneys who are willing to discuss such possibilities will do so on a case-by-case basis as they see fit. In order for loans to be discharged, it must be proven that the borrower experienced significant hardship while attempting to repay the loans.

It is quite difficult to prove significant hardship, because you must also prove that the future does not hold the promise of a brighter day. In addition, bankruptcy rules do not bother to spell out what ‘hardship’ actually means. Instead, there are some general guides about granting discharges.

Income Does the amount of the borrower’s income allow him or her to maintain a “minimum standard of living”? This does not include the standard of living for any dependents.

Duration If a borrower’s income is inadequate, how long will the borrower remain at this income level? For example, a disability or other life-changing event may have occurred after graduation, as evidenced by a disability determination, or even a lawsuit showing permanent disability.

Good Faith This is an all-important test. Can the borrower prove that he or she has made every reasonable effort to repay the loan?

One of the most accurate ways to measure the possibility of discharge is to really consider for yourself whether bankruptcy is actually necessary. If someone is financially stable except for student loan debt, for example, he or she cannot expect to discharge only student loans. Although there are exceptions to this rule, it overwhelmingly applies.

In general, courts no longer discharge student loan debt in bankruptcy. However, it is currently expected that if default rates rise (they are now at a low 7%), courts’ positions almost certainly will change. Until then, legal aid groups will continue to fight for consumers with serious hardships.

In the end, the future of student loan debt in unknown. Whether or not it can be discharged in bankruptcy now does not dictate what will be possible down the road, and if default rates rise discharge might be a likely possibility. Ultimately, it is essential that consumers learn about student loans before they can expect to be successful in managing them. Bankruptcy should be considered only in drastic situations.