Writing off student loans is not easy. You must convincingly show that paying the loan causes you undue hardship, a tough condition to prove.
Criminal fines and restitution and child and spousal support are types of debts that bankruptcy essentially never discharges. Income taxes can be discharged but only after meeting certain conditions. We’ve covered these in our last few blog posts. Today we cover student loans.
Student loans are more like income taxes than criminal or support debts in that they CAN get discharged in bankruptcy. Like an income tax, a student loan just needs to meet certain conditions.
But unlike an income tax debt, the conditions for discharge of a student loan are much vaguer. Most of the income tax conditions are clear. These conditions require a precise understanding of the law and a thorough knowledge of the facts of your case. But if you and your bankruptcy lawyer are careful, you should know before you file your bankruptcy whether you can discharge a tax debt.
Discharging student loans, in contrast, require meeting an ambiguous condition called “undue hardship.” Its ambiguity means that it’s much harder to predict whether or not a student loan will be discharged in bankruptcy.
Furthermore, because of this vague condition it’s possible to get a partial discharge. You may continue to owe some but not all of a particular student loan debt. Or if you have multiple student loans you may discharge some but not all of them.
Bankruptcy law states that an educational loan or benefit overpayment is not discharged in bankruptcy unless it “would impose an undue hardship on [you or your] dependents.” Section 523(a)(8) of the U.S. Bankruptcy Code.
Can you show the bankruptcy court that paying a student loan causes you “undue hardship”? If so bankruptcy can forever discharge that debt.
A More Precise Meaning of “Undue Hardship”
How does your bankruptcy court decide whether or not a student loan causes you a hardship?
How bad does a hardship need to be to qualify as an undue hardship?
In most parts of the country “undue hardship” requires you to establish all three of the following:
1. You currently cannot maintain even a minimal standard of living (for yourself and any dependents) if you pay the student loan.
2. This present financial situation is realistically anticipated to continue through the loan’s term of repayment.
3. You have acted responsibly in the past regarding the student loan, by making a serious effort to pay it and/or to attempt to qualify for any of the available programs to reduce or manage the loan.
The Student Loan Survives Unless You Establish “Undue Hardship”
It can be difficult to meet all three of these. If you don’t, you continue to owe the student loan.
Furthermore, the student loan creditor does not have to take any action itself. You and your lawyer have to raise the issue yourself. It’s up to you to start the ball rolling.
Generally you do so by filing an “adversary proceeding” during your bankruptcy case. This is a legal proceeding focusing exclusively on whether you qualify for a “hardship discharge” of the student loan.
If you believe you qualify, you could file a Chapter 7 “straight bankruptcy” case. Then your lawyer would file an adversary proceeding during the 3-4 months a basic Chapter 7 case usually lasts. The student loan creditor would most likely object. There would then be a trial with evidence on whether you meet the necessary factors to show undue hardship. There’s no jury—the bankruptcy judge decides.
You can do the same thing within a Chapter 13 “adjustment of debts.” Because this kind of bankruptcy usually lasts 3 to 5 years, it gives you more timing options. Chapter 13 would usually allow you to avoid making student loan payments at least temporarily. Then once you think you qualify for undue hardship your lawyer would file the adversary proceeding. This could be especially helpful if you have a deteriorating medical condition or an anticipated reduction in income.
Student loans are dischargeable in bankruptcy, but undue hardship is an ambiguous and often tough condition to prove. The law of undue hardship as interpreted by the courts is constantly adjusting, and can be slightly different in different bankruptcy courts. So it’s crucial to get highly competent legal advice about what’s best for you.