Can student loans be discharged in bankruptcy?

Just this week, I’ve talked with three prospective clients who want to try to discharge student loans in bankruptcy.

I don’t like delivering bad news, but it’s close to impossible to get rid of student loans by filing a bankruptcy.

Before 2005, private student loans were dischargeable in bankruptcy. Since then, very few federal, state or private student loans were able to be cleared with a bankruptcy.

Here’s an example of how hard it is to discharge a student loan: In 2008, there were 72,000 student loan borrowers in bankruptcy. A whopping 29 of those had their student loans discharged. Those are not great odds.

The bankruptcy courts require you to show “undue hardship” to get rid of a student loan. This means that a separate motion has to be brought before the judge and you have to show you made an effort to pay the loan and that continuing to pay it would mean that you couldn’t afford basic living expenses.

Nationally, the amount of student loan debt now surpasses credit card debt!

There is a proposed law in Congress that would allow private student loans to be discharged in bankruptcy. Here’s an interesting discussion of that proposal. I would not hold my breath waiting for this to pass.

The only remedy available for those in trouble on student loans is to file a chapter 13 bankruptcy. This will consolidate the loans and will stop interest and penalties. To do this, you need an income. Beyond income, you need what is called discretionary income, that is some money left to pay creditors after your basic expenses, to file a chapter 13.

For now, if you take out a student loan you are pretty much stuck with it, unless you qualify to file a chapter 13 bankruptcy.

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