Student Loans are Difficult – But Not Impossible – To Discharge in Bankruptcy
When we think of bankruptcy, we tend to believe that pretty much every debt is discharged when you file for Chapter 7 bankruptcy. But there is one type of debt that burdens thousands of people every day, that is, as of right now, almost impossible to discharge in bankruptcy: Student loan debt.
Differences in Debts
The way that Chapter 7 bankruptcy works is that with almost every other kind of debt, you file your bankruptcy, and you get your discharge. Assuming you have no property or assets, or that they fit within given exemptions, you generally will get your discharge without losing property. Even if you lost property to the bankruptcy trustee, you would almost always get the discharge. You do not have to show hardship, or demonstrate why you need your debts discharged.
However, when it comes to student loans, the filer has to show what is known as “undue hardship” to have the loan debt discharged. This is a very high standard to meet, and one that does not have a specific legal definition. The standard has been interpreted by courts as being so difficult that even the most struggling, desperate student loan borrowers often cannot meet the standard.
What Courts Will Look For
The court will even look to see if you have intentionally created a situation where you cannot pay your student loans. This makes student loans the only part of bankruptcy where the court looks at your behavior, or how your inability to pay your debt was “caused.”
In some cases, courts have refused to find undue hardship because people were paying what would seem like necessary expenses, such as cell phone bills or cable bills.
There is Some Hope
However, discharging student debt is not impossible. Many judges are taking a kinder eye towards discharging student loans. And many point out that the reason so few student loans are discharged is because so few borrowers even try to do so—by one study, only about 0.1% of borrowers even attempted to discharge their loans.
In some cases, borrowers who want to discharge their loans will end up with a compromise; courts do have the ability to grant a partial discharge. Additionally, in cases where lenders are giving borrowers a hard time about making payment arrangements, a bankruptcy filing may be enough to bring lenders to the table to work out a repayment schedule that you can live with.
Hope may be on the way. Often, legislation makes its way through congress seeking to make student loans dischargeable the way any other debt can be discharged. Thus far, those bills have failed to become law. But given it is an election year, there has been more talk of bankruptcy reform to help student loan borrowers.