Many a former students have wondered how to relieve their hankering debt worth tens or hundreds of thousands of dollars after receiving their education. Unlike other forms of debt, however, individuals have not been able to easily turn to bankruptcy for relief. Student loans are notoriously hard to have forgiven in bankruptcy court.
Why can so many other debts be forgiven when filing for Chapter 7 or Chapter 13 Bankruptcy but my student loans cannot be discharged?
Well, we don’t make the rules, and while we could rationalize and speculate exactly why the system is set up the way it is, we find it more helpful to discuss the exception to the rule, and whether or not the exception may apply to you and your situation.
So what is the exception?
Un-Due Hardship
Nearly 45 million Americans have student loans. If you are one such individual and you are finding it difficult to survive financially because of your student loan payments, you may be able to discharge part of all of your student loans by filing for bankruptcy and qualifying for “un-due hardship.”
Whether you’re considering Chapter 13 or Chapter 7 Bankruptcy, in order to qualify for this exception, you and/or your attorney would need to demonstrate that repayment would impose undue hardship on you and your dependents.
Un-due hardship takes many forms, but it boils down to this: you cannot keep a roof over your head and food on the table without keeping the money that you would otherwise be using to pay your student loan.
An important note to make here is that un-due hardship must be likely to continue for a significant portion of the loan repayment period. This means, if you are a medical student with an exorbitant amount of debt, you can’t file for bankruptcy, have your loans forgiven, and then go on to start a career in which you’re making a significant income.
An example of a possible qualifying situation would if you became incapacitated after an accident and are no longer able to work (not temporarily: for years and years.) This situation may allow you to file for bankruptcy and have your student loans discharged.
Another important note that will considered is whether or not you have been paying your loans up until the point you filed for bankruptcy.
So what if I file for bankruptcy but my student loans are NOT discharged?
To be clear: that is the norm. As stated earlier in this article, student loans are very hard to have discharged in bankruptcy court, so if yours are NOT discharged, you are in the majority, rather than the exception.
Some other options that could play out include: a plan to re-pay your loans but on better terms (i.e. a lower interest rate or lower monthly payment.) Or, you could apply for an income-driven payment plan and pay a percentage of your discretionary income for 20 or 25 years before having the remaining balance of your student loans forgiven. Or, you could request temporary deferment of your student loans. It’s best to discuss your potential outcome and options with an experienced bankruptcy attorney, to see what might work best for you.
Will all Americans have their student loans forgiven?
This is a highly politicized topic of debate. In the recent Heroes Act, the House Democrats had originally proposed that $10,000 of an individual’s student loans could be forgiven (of federal loans) and $10,000 of an individual’s student loans could be forgiven (of private loans.)
Instead of this proposal being left in its original form, it was re-worded to say that $10,000 of student loan debt would be canceled out for borrowers who were struggling financially, rather than all borrowers as originally worded.
Many politicians believe that student loan forgiveness would stimulate the economy. This is an especially important topic due to the recent economic downturn due to the COVID-19 pandemic. Presidential candidate Joe Biden supports the idea that student loans should be forgiven in bankruptcy (with much less difficulty than it currently takes.)
However, as Congress moves forward with the Heals Act, which includes the second stimulus, it is suspected that there will not be student loan debt forgiveness as part of the package. Opponents to debt forgiveness state that it is too expensive for the federal government and taxpayers and that it will not stimulate the economy.
Some opponents point out the un-ethical or un-fair reality that many Americans might have chosen to skip college or graduate school because of the high cost and instead go directly into the work force at a lower-paying job with less opportunity. On the other hand, the individuals who took out loans and went to college have better opportunities after graduation, and it is unfair to forgive their loans because the trade-off for spending money on a better education was the higher earning potential, knowledge, connections, and potential prestige that a university degree or graduate degree provides.