Student Loans and Bankruptcy

Student Loans and Bankruptcy

Chapter 7 bankruptcy does not discharge every kind of debt. The Bankruptcy Code includes a list of different types of obligations that cannot be discharged.

Understanding What Cannot Be Discharged

The best way to understand the difference between the dischargeable debts that you are released from, and the non-dischargeable debts that you can’t be released from, is to think in terms of acts committed by the debtor which amount to intentional wrongs, such as fraud. But also to think in terms of debts that have a very important social aspect to them such as taxes, student loans, alimony, spouse support and child support.

Student Loan Discharge

Typically, student loans are not dischargeable if they are partly funded by or guaranteed by a government entity or a nonprofit institution. This includes any student loan that carries payments that can be deducted from income taxes under the IRS Code.

Under some circumstances student loan debt may be discharged if it is proven that they impose an undue hardship on the debtor and any dependents of the debtor. Unfortunately, the process required to demonstrate this undue hardship can be extremely difficult for most debtors because it requires filing a lawsuit against the creditor. In this lawsuit the debtor has the burden of proof. Such suits can be complicated, time consuming, and often require the potentially expensive assistance of legal counsel.

Student Loan Discharge – Undue Hardship

Court decisions that rule the debtor is experiencing an undue hardship have been extremely rare. Typically these rulings have only been for individuals suffering from some type of severe permanent and total disability that drastically restricts the ability of the debtor to earn more than a subsistence level of income. The debtor must prove each of the following three elements:

  1. Based upon current income and expenses, the debtor cannot maintain a “minimal” standard of living for himself and his dependents if compelled to repay the student loans;and
  2. Additional circumstances exist that indicate this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
  3. The debtor has made good faith efforts to repay the student loans.