Discharging Student Loans in Bankruptcy: It’s Worth Talking to Your Lawyer

It is well known that student loans can’t usually be discharged in a bankruptcy case. What is not well known is why, and what you might be able to do about it.

Section 523(a)(8) of the bankruptcy code says that student loans cannot be discharged in either chapter 7 or chapter 13, unless repaying the student loans would be an undue hardship on you or your dependents. Unlike some other exceptions to dischargeability, this section contains no deadline for either you or the student loan creditor to bring the matter before the bankruptcy court.

Also, student loan dischargeability can be litigated in either state or federal court. This means you have several options for pursuing the discharge of student loans in bankruptcy, and none of them are time-sensitive.

The undue hardship standard is usually applied strictly by the bankruptcy court. This standard is typically held to apply only when it not reasonable to expect that you could ever repay the student loans. Courts have even stated that some hardship is to be expected when repaying student loans; they are dischargeable only when repayment would constitute an undue hardship.

It is difficult for a court to evaluate this, especially when you have just discharged all your other debts in a bankruptcy case and your budget just experienced a dramatic positive change. Also, lenders vigorously contest most student loan dischargeability cases, and you have to pay your own lawyer as well. Consequently, few persons ask the bankruptcy court to discharge their student loans.

It might be wise for some persons to wait for a year or two before asking the bankruptcy court to discharge their student loans. This way, a record of your post-bankruptcy household budget can be established, which could be more likely to show a history of inability to pay.

There could also be evidence of unfair collection activity, or ever-increasing student loan balances due to interest and costs of collection. Hopefully, this would tend to persuade the court that it not reasonable to expect repayment without an undue hardship.

This means you shouldn’t give up discharging your student loans in bankruptcy. Consult with your attorney, and maybe even with more than one attorney, after you have allowed some time to pass after your bankruptcy. You might also want to consider obtaining some written materials on student loan matters, and studying both bankruptcy and non-bankruptcy ways of dealing with onerous student loan debts. One such resource, Student Loan Law, is available from the National Consumer Law Center in Boston, Massachusetts, for under $100. While other similar information sources exist, this one is particularly useful because it is intended for both lawyers and non-lawyers.

The more you know about this subject, the more likely it is you can realistically assess whether it would be worth the time and money to attempt to obtain a ruling that your student loans can be discharged.