• 17
  • January
    2012

In our last two posts, we took a brief look at some arguments in favor of discharging student loans in bankruptcy. As we previously mentioned, student loan debt is not dischargeable in bankruptcy under current law unless there is a showing of "undue hardship." This has been the law since 1998, when Title IV of the Higher Education Act was modified to make discharge of student loan and grant liabilities much more difficult.

It used to be that student loans could be discharged only in certain situations, generally when the amount of time between the date the loan or grant was due or the date the bankruptcy was filed, and undue hardship. Under current law, undue hardship is the only factor considered. Proving undue hardship and thereby having the possibility of discharging student loans is tricky business, and it depends on the case law in each jurisdiction.

In order to prove undue hardship, many courts require that the debtor cannot maintain a minimal lifestyle for either self or dependents, that those circumstances are unlikely to change for a large portion of the repayment period, and that the debtor has made a good faith effort to repay the loans.

In reality, those requirements will apply to very few, making the possibility of discharging student loans in bankruptcy quite slim. Still, there are certainly individuals who will be able to take advantage of discharge.

Another thing to keep in mind is that certain types of federal loans are not dischargeable. To find out whether a federal loan is dischargeable, you can contact the Department of Education.

Source: Online: http://www2.ed.gov/offices/OSFAP/DCS/loan.cancellation.discharge.html; Federal Student Aid; gives overview of loan cancellation and discharge.