What Happens to My Student Loans in Bankruptcy?

According to Forbes Magazine, more than half of today’s college students leave school with student debt. Add those current loans to those taken out over previous years, and there is an estimated total of $1.75 trillion in total student loan debt. About 92% of those loans are federal and the remaining 8% are private loans.

While it is easy to assume that the highest debt is held by the youngest borrowers, the truth is that borrowers who are 62 and older, estimated to number 2.4 million people, are carrying the highest average balance of $49,375.

Considering these statistics, it is easy to understand why many people hope that bankruptcy offers a way to escape the burden of relentless debt. Unfortunately, student loans are typically left out of bankruptcy discharge.

The reason that student loans generally don’t get discharged in bankruptcy is that a specific policy enacted as an amendment to the Higher Education Act required that they be treated differently from other types of debt, like medical debt or credit card balances. In response to concerns that students might purposely borrow money for school and then declare bankruptcy afterward, Congress revised the U.S. bankruptcy laws. The revision mandated that only those who could demonstrate “undue hardship” could discharge student loan debt.

Undue hardship has a specific definition and requires satisfaction of three specific conditions:

  • The debtor needs to show that they cannot maintain a minimal standard of living for themselves or their dependents if forced to repay the loan.
  • The debtor needs to show that additional circumstances exist that make it likely that their financial situation will persist for much of the repayment period.
  • The debtor needs to show that they have made a good-faith effort to repay the loans.

These rules prohibiting discharging student debt

in bankruptcy apply to both Chapter 7 and Chapter 13 bankruptcy filings, and the inverse holds true for those who seek a waiver based on undue hardship: they must file for Chapter 7 or Chapter 13 bankruptcy to qualify, as well as filing an additional lawsuit called an adversary proceeding asking for the debt to be discharged.

If your debt stems from or is exacerbated by your student loan debt, you need legal guidance. Contact us today to discuss your situation.