Student Loans – The Worst!
Student loans in bankruptcy are a hot topic in my field and one of the most frequently asked questions I get. The answers are rarely satisfying though. The direct question, “Can I eliminate student loan debt in bankruptcy?” has a simple answer: “Almost always, NO.”
Now, there are a few exceptions. The law says that student loans are excepted from discharge unless the debtor can show the loans impose an “undue hardship” – the problem is, Congress never bothered to define what qualifies as an “undue hardship” so the Courts have wrestled with this phrase for decades. Thanks Congress!
The threshold to reach undue hardship is presently very high, though it does differ among the circuits. There was hope this time last year that SCOTUS would take up the issue, but they passed. Nebraska and Iowa are in in the 8th Circuit and we use a “totality of circumstances” test, but some circuits use more stringent tests.
The only way to discharge student loans in bankruptcy is to file a lawsuit (known as an “adversary proceeding”) within the bankruptcy case against the student loan provider(s) and request relief from the bankruptcy court. The debtor has to prove undue hardship and typically show that 1) they have tried to make payments or tried to make payment arrangements with the lender, 2) that the student loan debt keeps them at or below the poverty line, 3) that there is no foreseeable change in circumstances that will make it any easier for them to pay, and 4 )the underlying education they received has not translated to a well-paying job in their field. Victories by debtors has increased in the past 2-3 years, but the percentage of student loan discharge is still extremely low.
What I tell my clients is that they should NOT expect to get student loan relief in bankruptcy as the laws are presently constituted. There has been some efforts by House democrats to provide new avenues of relief, but so far they have not made any progress there. If the Dems win the White House and make in-roads in Congress this election term, maybe that will change. Big maybe. I have a lot of clients who are in school or considering going back to school and I tell them to assume their loans will have to be paid back no matter what. I also tell them that because of all this, student loan debt is the worst type of debt to have, right up there with delinquent taxes. Avoid if at all possible!
© Wesley Bain, Attorney at Law