Student loans and bankruptcy

Question: How are student loans and herpes alike?
Answer: You can’t get rid of either one of them.

When I first began practicing law (more years ago than I care to remember) it was common for students to incur substantial debt by means of student loans, and then to discharge those loans in bankruptcy shortly after graduation, thus providing the student with a debt free start in his or her new life after school.

Several years ago, however, Congress determined that the discharge of these loans by students who received an education – and thus more earning power – by virtue of these school loans was an abuse of the bankruptcy process. Accordingly Congress enacted bankruptcy code provisions that specified that nearly all student loans would be non-dischargeable – meaning that these debts would survive the bankruptcy and could not be eliminated by the Debtor.

The lone exception provided in the Bankruptcy Code says that student loans can be discharged if these loans would impose an “undue hardship” on the Debtor and the Debtor’s dependents. The courts have interpreted this exception very strictly and narrowly. To sustain a showing of undue hardship, the debtor must show that he or she cannot now and in the foreseeable future, maintain a reasonable, minimal standard of living for debtor and debtor’s dependents and still afford to make payments on debtor’s student loans. In other words, the debtor must be able to show that not only can he not make the loan payments now, but that it is unlikely he or she will be able to make those loan payments in the future.

Needless to say, this is a standard that is very difficult to meet. It requires a debtor in most cases to establish as a practical matter that he or she is permanently disabled to the degree that it would be impossible for the debtor to earn anything beyond what is required for a minimal, subsistence living. Therefore, for the great majority of those who file bankruptcy petitions, their student loans will not be affected by the bankruptcy, and they will have to be paid.

If you have questions about how your student loans would impact your ability to file a bankruptcy petition, please call me at (507) 663-1211 or email me to schedule a free confidential appointment.