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Can massive student loan debt be discharged through bankruptcy?

On Behalf of | Jan 2, 2020 | Bankruptcy

One of the biggest myths in bankruptcy law is that student loan debt can never be discharged. While it is not common, getting rid of overwhelming student debt is not impossible.

Student loans have always been eligible for bankruptcy proceedings, and before 1976, few issues existed for getting them discharged. However, since that time, rules have gradually changed, making it more difficult.

What changed in the law?

As debt from student loans began to pile up, rules over dismissing them through bankruptcy also changed. The first significant adjustment was that loans could only be forgiven if a person had been making payments for at least five years – later changed to seven years. Then, in 1998, Congress said student loans could only be discharged if they created an “undue hardship,” but didn’t define what that meant.

What is the student loan bankruptcy test?

Those filing for bankruptcy to discharge student loan debt must meet three requirements:

  • Repaying your student loans will make it impossible to support you and your family
  • Your current financial difficulties are likely to continue and are not your fault
  • You have taken all steps possible to increase your income and reduce your expenses

Passing the test can be challenging

For some, bankruptcy may not be an option due to a wide variety of forgiveness options and repayment plans. Some federal loans are income-driven, so if you have no income, your payment may be as low as $0 per month.

If you are disabled, you may qualify for a “disability discharge” to get your loans forgiven, which means bankruptcy may not be the optimal way to erase those debts. The process can be complicated, so consulting an experienced bankruptcy attorney is a good way to explore what options are best for you.

Judges want to hear more cases

If you and your attorney decide bankruptcy is the best solution, they will file an “adversary proceeding” on your behalf, which helps determine if your loans constitute an undue hardship. This hearing will involve a judge who will decide whether you pass the test.

Experts say judges don’t hear enough student loan bankruptcy cases, which limits their ability to determine case law. Since Congress’ definition of undue hardship is vague, many believe as more cases are heard, standards will evolve over when loans may be discharged.