Dischargability of Student Loans

One of the more common questions that is asked by potential clients is whether student loans are dischargable in a bankruptcy. Many people have minimal other debt, but have large student loan balances and are looking to bankruptcy as a potential solution. Unfortunately, student loans are rarely dischargable.

Prior to 1998, student loans could be discharged in a bankruptcy, so long as the student loan debt had been in active pay status for over seven years. However, the law was changed and now a Debtor must show that the student loans are a "hardship". While the term "hardship" may seem like a relatively low standard wherein the Debtor must show that the student loan is an encumbrance to paying other recurring expenses, such as food or a mortgage payment, that is simply not the case. In order to show that an actual hardship is occurring to the extent that student loans would be dischargable, the Debtor must show that the student loan debt is preventing him or her from providing a minimal living standard for the Debtor and his or her dependents. In plain English, the Debtor needs to show that he or she is unable to work or otherwise obtain any income, and that the prospect for obtaining the ability to work or otherwise generate income in the future is non-existent because of a permanent mental or physical disability. Therefore, it is nearly impossible to discharge student loan debt in a bankruptcy. This rule holds true regardless of whether the student loans are public or private.

This does not mean that bankruptcy cannot be a solution to a problem with student loan debt. For example, a Debtor with past due balances can file a Chapter 13 bankruptcy to reorganize his or her debt and provide a mechanism to catch back up. Even if a borrower is not behind on the student loan, a Chapter 13 may lower the monthly payment for the next five (5) years. This may allow the sought after "breathing room".

It should be noted that school tuition debt is dischargable in bankruptcy. Therefore, it is important to know the nature of a school related debt before making a decision as to whether bankruptcy can be a solution to student debt problems.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia. For more information about bankruptcy and the services offered by his firm, please feel free to visit the firm's website. If you would like to schedule an appointment to discuss bankruptcy with an attorney, call 301-816-1600, or click here.