Private Student Loans in Bankruptcy

Discharging private student loans in bankruptcy is difficult, not not impossible. Learn more.

If you have private student loans, you might be able to discharge them in bankruptcy. However, you must prove that repaying the loans would cause you undue hardship. Traditionally, this is been an extremely difficult standard to meet. Recently, however, some courts are becoming a bit more lenient.

Student Loan Debt in American

Student loan debt has grown into a huge burden on college graduates in America. A 2013 study by the Federal Reserve Bank of New York found that nearly half (47%) of 25-year-olds surveyed had student loans, up 27% from 2004, according to the New York Times.

When these educational loans are private student loans instead of federal, the debt can be even more burdensome, and many stressed out graduates are wondering if bankruptcy can help.

What Is a Private Student Loan?

There are many different types of student loans, but all student loans basically fall into one of two categories: private loans and federal loans.

Federal student loans are educational loans funded by the federal government. They typically have low, fixed interest rates and are available to most people, even those with poor credit or little income.

A private student loan, on the other hand, is an educational loan you can obtain from a bank or other private lender rather than from the federal government. Private student loans typically have higher interest rates and are subject to credit approval.

To learn more about student loans, visit Nolo's  Student Loan Debt  topic area.

How Private Student Loans Are Treated in Bankruptcy

Bankruptcy typically allows those who qualify for it to completely discharge unsecured debts. These types of debts include credit cards and personal loans -- anything that is not backed by collateral. However, there are exceptions to discharging even unsecured debts in bankruptcy, and one of those exceptions is the student loan debt exception.

In 1978, bankruptcy laws were changed so that a person could not get rid of federal student loan debt in bankruptcy. Private student loan debt was still dischargeable, though, and you could file bankruptcy to get rid of burdensome private student loans. Unfortunately, the bankruptcy laws changed again in 2005, and now you cannot get rid of any type of student loan -- federal or private -- in bankruptcy unless you can show an extreme hardship.

Showing hardship extreme enough to discharge a student loan has traditionally been very difficult. In the past, those who were able to discharge student loans suffered from very serious disabilities that made it impossible for them to maintain employment. The fact that it was  possible  for someone to work usually meant that he or she could not get rid of that student loan debt in bankruptcy, no matter how hard it was to maintain and no matter how long it took to find a job. (To learn more about the hardship test, see  Student Loans in Bankruptcy.)

Fortunately for some, there is an increasing trend of leniency in certain jurisdictions throughout the country. Some bankruptcy courts are deciding in a student's favor and allowing discharge of student loan debt even in cases where the student is not disabled. If you have private or federal student loan debt and feel that the payments create an undue hardship for you, bankruptcy may still be an option.

Using Chapter 13 to Help Repay Private Student Loan Debt

While Chapter 13 bankruptcy, which requires you to repay some or all of your debt, does provide some options for student loan debt, you will still owe whatever is left on the loan even if you obtain a Chapter 13 discharge (unless you can meet the hardship test). (Learn more about  how Chapter 13 bankruptcy works.)

Pending Legislation on Private Student Loans

In response to the growing student debt problem in the United States, Illinois senator Richard Durbin has proposed a bill to Congress that would allow consumers to once again discharge private student loan debt in bankruptcy. Senator Durbin originally proposed the Fairness for Struggling Students Act in 2011, and he reintroduced it in early 2013. If passed as written, the Act would amend the bankruptcy laws to allow those filing to include their private student loan debt in their bankruptcies and wipe them out, just as they can with credit card debts and medical bills.

The bill is still pending with the Senate Judiciary Committee and has yet to make it to the Senate or the House. If passed, the bill would provide welcome relief to many graduates who cannot keep up with their crushing private student loan debt.

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