You may have heard that students cannot discharge college loans in bankruptcy, but that is not entirely true.
Most student loans are not automatically discharged in bankruptcy, but it is not impossible to have your student debt forgiven.
The percentage of students who discharged their loans in bankruptcy accounts for only 0.1% of student filers.
Some students have their debt discharged because repayment would cause an “undue hardship” on them and their families.
Further, some private student loans can be discharged because they are unsecured consumer loans rather than educational loans.
Below, our bankruptcy attorney, Blake Goodman, will go over the details of student loans and if they are dischargeable when you file bankruptcy.
If you have questions, please contact the lawyers at Blake Goodman, PC, Attorney today.
What Does the Bankruptcy Code Say About Student Loans and Bankruptcy?
Congress removed most student loans from forgiveness in bankruptcy to protect the long-term health of student loan programs.
Thus, Section 523(a)(8) of the Bankruptcy Code exempts most student loans from bankruptcy discharge, including:
- Federal student loans and loans made by a non-profit organization;
- A qualified education loan, as defined in Section 221(d)(1) of the Internal Revenue Code of 1986; and
- Funds received as an educational benefit, scholarship, or stipend with an obligation of repayment.
However, borrowers still have the opportunity to argue that continuing with the student loan debt will cause an “undue hardship.”
The Undue Hardship Exception
Student loans can be discharged on an individual basis if the loans will cause an “undue hardship” to the borrower.
To prove undue hardship under section 523(a)(8), you must show that:
- If forced to repay the loans, you cannot maintain a minimum standard of living for you and your dependents based on current income and expenses;
- Your situation is likely to continue for a large part of the repayment period; and
- You have made a good faith effort to repay the loans.
The courts treat this as a stringent test. You must demonstrate more than just limited finances and “garden-variety” hardship.
A judge will weigh your evidence in what is known as an “adversarial proceeding” outside the bankruptcy hearing.
Exceptions for Private Students Loans in Bankruptcy
Some courts have found that private educational loans do not constitute “an obligation to repay funds received as an educational benefit” within the meaning of subsection 523(a)(8)(A)(ii).
Therefore, private student loans not used for the cost of attendance (such as tuition, books, room, and board) do not qualify as educational debt.
This can happen if the loan is paid directly to a consumer or covers expenses while studying for the bar exam or attending a medical or dental residency.
Thus, a private student loan may be dischargeable because it is a general unsecured debt rather than an educational loan.
Contact a Bankruptcy Attorney Today
At Blake Goodman, PC, Attorney, we dedicate our practice to guiding Hawaiians through financial hardship.
Our compassionate bankruptcy attorneys will help you find the best option for discharging your private student loans in bankruptcy.
Contact us today for a free consultation at our offices in Honolulu, Kaneohe, Aiea, or Maui.