Student Loans & Bankruptcy
Are Student Loans Dischargeable?
Student loans are difficult, but not impossible, to discharge in bankruptcy. Decisions about whether student loans are eligible for discharge are not a part of the standard bankruptcy process. In order to request consideration for discharge of student loans, you must file a petition (called an adversary proceeding) to get a determination.
As part of your petition for discharge of student loans, you must show that payment of the debt “will impose an undue hardship on you and your dependents.” Proving hardship usually requires showing that you can't provide a minimum standard of living for yourself and your dependents if you have to repay the loan. If you can successfully prove undue hardship, your student loan will be completely canceled. Alternatively, Chapter 13 bankruptcy can provide a way to cure defaults on student loans, or to pay them off over the course of the plan.
A qualified bankruptcy attorney can help you determine whether filing an adversary to discharge student loans has a reasonable chance of success.
UNDUE HARDSHIP EXAMPLES It is up to the court to decide whether you meet the “undue hardship” standard. Here are a few examples of successful and unsuccessful cases.
1. A 58 year old I.R.S. employee making about $38,000/year was able to get his loans discharged. He had taken out the loans to attend a chiropractic program which he never completed. His overall expenses were about equal to his income. He was able to show that it was unlikely that his income would increase until his planned retirement at age 65. He was single with no dependents and had health problems. The court found that he had acted in good faith even though he had never made any voluntary student loan payments.
2. A college-educated married couple proved undue hardship and were able to discharge their loans. They both worked, but had income barely above poverty level. The court noted that the borrowers worked in worthwhile, although low-paying careers. One worked as a teacher’s aide and the other as a teacher working with emotionally disturbed children. Even with a very frugal budget, they had $400 more a month in expenses than income. Their expenses included $100 monthly tuition to send their daughter to private school. Relatives paid for most of this and the couple testified that they objected to the public school’s corporeal punishment policy. In agreeing to discharge the loans, the court also found that the couple had acted in good faith because they asked about the possibility of a more affordable repayment plan. Not all courts are as sympathetic to borrowers who work in low-paying careers. For example, one borrower was denied a discharge because he worked as a cellist for an orchestra and taught music part-time. The court suggested that this borrower could find higher-paying work. Another court came up with the same result for a pastor. The court found that it was the borrower’s choice to work as a pastor for a start-up church rather than try to find a higher paying job.
3. A number of courts have granted discharges in cases where the borrower did not benefit from the education or went to a fraudulent school.
4. There have been mixed results when borrowers have tried to show that their financial difficulties will persist into the future. For example, one court found that a borrower’s alcoholism was not an insurmountable problem, but some borrowers have won these cases. In one case, a borrower’s testimony about her mental impairment, including evidence that she received Social Security benefits, was enough to convince the court of undue hardship. The court agreed with the borrower that her ongoing mental illness was likely to continue to interfere with her ability to work.
Bankruptcy & Future Eligibilty for Student Loans
Federal Loans: Generally speaking, a bankruptcy should have no impact on eligibility for federal student aid. As long as there are no delinquencies or defaults on student loans currently in repayment, the student should be eligible for additional federal student loans, regardless of any past bankruptcies. Title IV grant or loan aid (including the Perkins loan program) may not be denied to a student who has filed bankruptcy solely on the basis of the bankruptcy determination. Student's post-bankruptcy credit history can be used in determining eligibility for future student loans.
Private Loans: Most bankruptcies will have an impact on eligibility for private loan programs, including some school loan programs. Many private loan programs have credit criteria that preclude people with a bankruptcy within the past 7 or 10 years from borrowing without a creditworthy cosigner. There are, however, exceptions if the bankruptcy was initiated for reasons beyond the borrower's control, such as extraordinary medical costs, natural disasters, or other extenuating circumstances.
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