Student Loans in Bankruptcy

Bankruptcy Legislation May Allow Student Loan Discharge in Bankruptcy

US News reported May 3, 2010 in "New Hope for Debtors Struggling With Student Loans" that the majority of Americans who use loans to pay for college get jobs and pay off debts, but the economic troubles prolong unemployment causing thousands of graduates to fall behind on their student loan payments. More than 20 percent of students who took out private loans in the last several years to pay for tuition have defaulted. Around seven percent of those who took federal student loans in 2007 have defaulted.  People in Washington DC are pushing reform to allow those who file bankruptcy to get out of their private educational loans.

Student Loan Debt Unlikely to Be Discharged

When someone is not able to pay back student loans, bankruptcy may not be the answer. The person can file bankruptcy to get other debt besides student loans discharged to free up some cash, but student loans are not normally included in a bankruptcy filing as dischargeable debt. 

The Department of Education is usually an opposing party when someone wants to get rid of student loans.  In the rare instances where someone can get student loans cancelled, the person has to show undue hardship. 

Undue Hardship

Undue hardship may be established by showing how the loans affect the person, family, or dependents.  It is hard to prove undue hardship unless a person is physically unable to work and there is no chance of the person making money. The person may show s/he’s physically unable to work by indicating his/her only income is social security or welfare.  If the person argues s/he’s able to work because of mental abilities, though there may be physical disabilities, the person unlikely suffers undue hardship.

For example, someone wants student loans discharged so s/he can apply for financial aid for an advanced degree. The person might argue economic loss in not having the peace of mind of the debt discharged, but if s/he believes s/he has mental abilities like becoming a mathematician, then s/he is able to work.  This ruins the defense of not being able to earn a living.

Motion to Discharge Student Loan Debt

To get any student loans discharged, a person files a separate motion with the bankruptcy court.  Bankruptcy courts are reluctant to discharge student loans because Congress did not intend for them to be discharged in bankruptcy.

When a student loan is not cancelled, the person has to negotiate with the lender for a payment plan or to pay a fraction of the amount.