Student Loans and Bankruptcy: Current Law and Proposed Changes

The purpose of bankruptcy is to provide a fresh start to people who are buried so deeply in debt they are unable to dig themselves out without help.  At the close of bankruptcy, the court issues an order that says that all debts that are dischargeable are discharged.

Many people do not realize that this general order does not wipe out their student loan debt. Student loans are not dischargeable in bankruptcy unless the Bankruptcy Court specifically finds that repaying them will create an “undue hardship.” The court order discharging the debts must specifically state that the student loan debt is discharged.

Requirement of undue hardship

If you have student loan debt and hope to have it discharged in bankruptcy, you need the services of a bankruptcy attorney who has experience in dealing with student loans. It is not an easy thing to do, but student loans may, in some cases, be discharged. Some of the basic requirements are:

• You must file a separate petition requesting discharge of student loans due to undue hardship
• You must present evidence that based on your current income and expenses, a minimal standard of living is not possible if funds are required to make payments to repay student loans
• Present evidence that your dire financial situation is not likely to change
• You have made a good faith effort repay the debt

The courts are not consistent in their rulings. For example, in one case, a court found undue hardship for a teacher’s aide because the aide was engaged in a worthwhile career even though in a low-paying job. In another similar situation, a different court determined repayment did not create an undue hardship for a part-time music teacher and orchestra cellist. The court said the musician should find better paying jobs.

Proposed changes to the Bankruptcy Code

According to the Center of American Progress (CAP), approximately 45 percent of all American families are mired with student loan debt.  CAP issued a report in August 2013 calling for reform to the bankruptcy code so that student loan debt can be discharged in bankruptcy the same way credit card debt is discharged.

In February 2013, H.R. 532 was proposed and sent to a committee. The measure would amend the bankruptcy code to allow private student loans to be discharged in the same was as credit card debt. The bill still languishes in the committee and there has been no further action.

Financial experts still urge legislative reform. They note that as long as it is so difficult to discharge student loan debt, people will be burdened for their entire lives. They will find their credit scores damaged and even have problems getting loans for houses and cars.