Are student loans dischargeable in bankruptcy?

Bankruptcy is often an incomplete solution for those struggling with student loans.

Many young people go to college in order to ensure that they have a good chance of landing a high-paying job. Unfortunately, however, many people do not end up securing the type of employment that they had anticipated after getting their education. This can lead to a situation in which a graduate cannot afford to make their student loan payments.

Since student loans are often "mortgage sized," former students that are unemployed or underemployed have little chance of keeping up with the payments each month. A person in this situation may hope that filing bankruptcy will help. Although bankruptcy may be able to help a few discharge their student loans, most will likely only be helped in an indirect way.

Student loan debt and bankruptcy

The bankruptcy laws in effect do not allow student loans to be discharged. This was not always the case. Until the mid-1970s, federal student loans were completely dischargeable. Around that time, however, Congress passed legislation intending to protect taxpayers from being on the hook for discharged student debt. When the current bankruptcy law went into effect in 2005, it became nearly impossible to discharge student loans in bankruptcy.

Under the law as it now stands, student loans may be dischargeable if the borrower can demonstrate an "undue hardship." Most courts have defined this to mean:

• The student loan debt is so burdensome that it is impossible for the borrower to maintain a basic standard of living if forced to pay back the loan;

• The borrower has tried in good faith to pay back the loan; and

• The borrower's financial situation is unlikely to get better during the loan's repayment period.

This is an extremely difficult test to pass. As a result of the high burden, most people fail or never try to discharge their private student loans in bankruptcy.

Change to laws unlikely

Sensitive to the heavy financial burdens carried by former students, which is estimated to be $1.2 trillion, the Senate has introduced a bill aiming to change the bankruptcy rules regarding student loans. The proposed Fairness for Struggling Students Act of 2015, would allow private student loans to be discharged in bankruptcy. The bill, as it is written, would not affect the dischargeability of federal student loans, which currently comprise 90 percent of outstanding student loans.

Unfortunately, the bill has long odds of being passed in a Republican-controlled Congress. Therefore, it is very unlikely that any of those struggling with student loans will see relief via bankruptcy discharge any time soon.

Although it may seem that bankruptcy would be unable to help with your student loans, that is not always the case. If you have significant other debts, such as credit card bills or medical expenses, Chapter 7 bankruptcy can discharge them, freeing up much-needed cash flow to devote to your student loans. Chapter 13 can consolidate your debt and give you the opportunity to catch up on your missed payments over three to five years while protecting you from collection actions.

To learn more about how bankruptcy can help you with your student loan debt, contact The Rose Law Office. Our attorneys can help you get back on track financially.