The Basics: Student Loans in Bankruptcy

Student loans are difficult to write off in bankruptcy because the standard for doing so is very tough. But you might still qualify.

 

The Law

Bankruptcy law totally excludes certain types of debts from being “discharged”—legally written off. An example is back child support. Other special types of debts are different in that they CAN be discharged under certain conditions.

Student loans are among those that sometimes can. They are more like income taxes, which can be discharged as long as the tax in question meets some specific conditions. With income taxes there is a list of conditions—most related to the passage of time—whereas with student loans there is only one condition. Yet determining whether a student loan can be discharged is much, much more difficult than determining whether an income tax can be discharged. That’s because the conditions for discharging income taxes are much clearer and ascertainable than is the single condition for the discharging student loans.

The Vague and Tough Single Condition: “Undue Hardship”

Bankruptcy law only allows a student loan to be discharged if “excepting such debt from discharge… would impose an undue hardship on the debtor and the debtor’s dependents.”  That’s all it takes to discharge a student loan—showing a bankruptcy judge that if the student loan was not discharged and you had to pay it, that would cause you or your family “undue hardship.”

The Meaning of “Undue Hardship”

What in the world do those two words mean? What is a “hardship,” and how much harder of a hardship does it have to be to qualify as an “undue” hardship?

The phrase “undue hardship” did not even originate with Congress. It was lifted verbatim from a bill proposed back in the early 1970s by a Commission on the Bankruptcy Laws, formed to make proposals for a total overhaul of our bankruptcy laws. When Congress adopted that term and wrote it into law, it did not explain what that odd combination of two words meant. Many other important terms used in the Bankruptcy Code are explicitly defined within the Code, but not this one. So bankruptcy judges and courts of appeals have been scratching their heads over the years trying to decide how to apply it.

The dictionary meaning of “undue” is “excessive, going beyond the limits of what is normal.” So “undue hardship” appears to mean that a student loan can be written off if it causes you excessive hardship. As one court said, “Congress viewed garden-variety hardship as [an] insufficient excuse for a discharge of student loans.” Regular old hardship just isn’t good enough.

So what practical standard can a bankruptcy court use to tease out the difference between mere garden-variety hardship and an honest-to-goodness undue hardship?

Three Conditions

Over time most of the bankruptcy courts in the country have largely settled on a more or less practical standard for “undue hardship.”  To reach the required level of hardship, you need to meet three conditions (yes, the single vague condition has been expanded into three somewhat less vague ones!):

1. Making the required payments on the student loan under your current income and expenses  would leave you unable to maintain even a minimal standard of living.

2. This current situation of being unable to maintain a minimal standard of living is expected to continue over all or most of the repayment period of the student loan.

3. Since becoming obligated to repay the student loan you have made a real effort at paying it, plus have tried to qualify for any applicable forbearances, debt consolidations, and administrative payment-reduction programs to address the debt responsibly.

 

Important Practicalities

  • You continue to owe a student loan debt after your bankruptcy case is over, unless you bring the “undue hardship” issue before the bankruptcy court and get a decision in your favor.  
  • Timing is important. You may not qualify for an “undue hardship” now, but you might in the future. For example, you may not qualify now but may well later if you have a slowly worsening medical condition. If your bankruptcy case is expected to close in the meantime, consider the tactic of reopening your bankruptcy case later so you can get an “undue hardship” decision from the bankruptcy judge then.
  • If in your situation you believe you would have a good chance of qualifying for “undue hardship” discharge within the next 3 or 4 years, consider filing a Chapter 13 “adjustment of debt” bankruptcy now. You may well avoid making any student loan payments for the next few years, during which time your Chapter 13 plan could very likely greatly reduce how much you would pay to your other creditors. Then towards the end of your 3-to-5-year case or as soon as you became eligible, you would ask the court for an “undue hardship” determination, while your Chapter 13 case is still open.

Conclusion

In most situations it is not easy to meet the three conditions of the “undue hardship” standard. All three have to be met, and it’s a rather fact-intensive, risky, and expensive legal process. But an increasing number of people have large student loans as part of—and often a very large part of—their debts. If that is your situation, it’s crucial you get excellent legal advice from an experienced and conscientious bankruptcy attorney. The larger your student loans, the larger of an impact they will have on your future, and all the more important that you know your precise rights and options. 

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