If you owe money to student loans, you don’t have many options when it comes to bankruptcy. Student loans cannot be discharged in a Chapter 7 or a Chapter 13 bankruptcy unless you can establish substantial hardship. Changes to the U.S. Bankruptcy Code in 2005 made even private student loans non dischargeable.
Outside of bankruptcy, a defaulted student loan can be rehabilitated, consolidated, stretched out or discharged due to disability. And if the school closed before you finished your studies, the loan may be unenforceable. But inside the bankruptcy court? Unfortunately, not much can be done. That’s one reason why it’s a good idea to talk with a student loan lawyer when you’re mapping out your options.
The best you can do with in bankruptcy to help your student debt problem may be to wipe out your other debts, or use Chapter 13 to stabilize the repayment for a 3-5 year period.
So What Is Undue Hardship When It Comes To Student Loans?
Undue hardship typically means that you can’t maintain a minimally adequate standard of living and repay the loan. The rule, found in the case of Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 2d Cir. 1987, requires you to prove the following:
- That your cannot maintain, based on current income and expenses, a minimal standard of living for yourself and dependents if forced to pay off student loans;
- that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
- that you have made good faith efforts to repay the loans.
Discharging Private Student Loans In Bankruptcy
The 2005 amendments to the Bankruptcy Code expanded the definition of student loans to include private student loans as well as the federally-guaranteed ones. This means that no student loan is dischargeable in bankruptcy unless the court finds undue hardship exists.
Section 523(a)(8)(B) of the U.S.Bankruptcy Code adopts the IRS definition of a qualified education loan found in 26 U.S.C. 221(d)(1), which says:
The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses -
(A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,
(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and
(C) which are attributable to education furnished during a period during which the recipient was an eligible student. Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72(p)(4)) or under any contract referred to in section 72(p)(5).
If you want to try to discharge a student loan debt, you’ll need to bring an adversary proceeding and prove your case. I warn you in advance, though; proving undue hardship in bankruptcy court is no easy task. Though it’s never a great idea to file your own bankruptcy case, doing so with the intention of getting your student loan debts wiped out is filled with even more difficulties.
Jay S. Fleischman, the Managing Attorney of our Southern California office, speaks regularly at national events on the subjects of credit, debt, bankruptcy, and consumer protection. 
David B. Shaev, the Managing Attorney of our New York office, has been a bankruptcy lawyer for over 35 years. 
student should pay the loan amount before involved in bankruptcy
Thank you for this highly informative post …. the 2005 amendments to the Bankruptcy Code that includes private as well as the federally-guaranteed student loans is not a welcome move and could hurt people who are in genuine difficulty. In my view, student loans should be treated as any other personal liability within the context of the Bankruptcy Act … hopefully this amendment will challenged in the courts in the not too distant future.
A partial list of defense you may raise is as follows:
1 death of borrower
2 permanent and total disability of borrower
3 loan discharged or CURRENTLY IN BANKRUPTCY