In an era where an undergraduate degree can cost an astounding $200,000, people often ask us whether bankruptcy can help them escape student loans. The unfortunate reality is that few people have the option to discharge (free themselves of) student loans through bankruptcy. The way the US Bankruptcy Code currently reads, you must face severe financial difficulties (“undue hardship”) to be eligible for discharge.
As long as you have the ability today to pay back your student loans — or even hope of having that ability in the future — you are probably out of luck. That said, there are cases where it is possible to discharge your student loans in bankruptcy. A bankruptcy attorney can help you evaluate your individual situation and determine whether you qualify.
The history of student loans and bankruptcy
Before 1976, student loans were dischargeable in bankruptcy like any other unsecured debt. In 1976, the government enacted the US Bankruptcy Code that we follow today. Back then, however, it was possible to discharge public student loans and private for-profit student loans if they had been in repayment for five years or the debtor could prove that the loans caused an undue hardship. Of course, back then, student loans were neither as big nor as numerous as they are today.
In the 1990s, the ability to discharge student loans slowly diminished. The repayment period necessary before a full discharge went from five years to seven years and then was entirely struck out of the Code. Finally, in 2005, substantial changes to the US Bankruptcy Code protected private loans from discharge, leading us to where we are today: very little option for individuals struggling under massive student loan debt.
Who can discharge student loans in bankruptcy?
It takes a rare situation to be able to discharge student loans. You must be able to show that paying back your student loans would make it impossible for you to maintain a certain, minimal standard of living over a significant portion of the loan repayment period.
While there is no definition of minimal standard of living, courts will look at a variety of factors, including how many assets you own, whether you are below the federal poverty level and how many dependents you support. You must then show that, absent some stroke of luck, you will not be able to rise above that standard of living and pay back your student loans during the repayment period.
Finally, you must also show that you have made a good faith effort to pay back your student loans, but have been unable to do so due to the financial challenges you face. For example, the court may look to see whether you attempted to restructure your student loan or took advantage of loan options such as deferments. They will also look at your expenses, the other financial resources available to you and your earning potential.
Examples of people who may qualify include:
- A single mom of a disabled child who is not receiving child support and cannot work
- An individual with a permanent disability who is unable to work a steady job and whose job prospects are severely limited by the disability
Every situation is unique
Every individual who struggles from debt faces a unique situation. Student loans are often only part of the debt picture. While you may not be able to discharge your student loans, bankruptcy may still be a good option to clear your other debts and set you on a better financial path. An attorney can help you explore your options.
Interested in learning more? Start by watching our video.