Can I get rid of my student loans in bankruptcy?

You may have heard that your can’t get rid student loans in bankruptcy, and for the most part, that’s right. That includes student loans that you have taken for your own education, as well as loans that you’ve guaranteed for a child or other family member. To discharge a student loan, you have to show “undue hardship,” which is a tough standard to meet. Since 1979, the Bankruptcy Code has made it very difficult to discharge student loans in bankruptcy. Back then, if you made an effort to pay student loans for at least seven years, you could file bankruptcy and discharge those debts. But every few years since then, Congress has made it more and more difficult to do anything about student loans. Currently, any educational loan that is guaranteed by any government, or made under a program funded by a non-profit entity, or on which the interest is tax-deductible, is almost never dischargeable (by the way, if you or a family member pays on any student loan, you should check with your tax preparer; very often the interest is tax-deductible).

It’s clear what kinds of loans are guaranteed by the government; most student loans are guaranteed by the U.S. Department of Education—this includes any loan called a “direct” loan, or any loan that is payable to the Department of Education, or Sallie Mae. Most student loans made by a bank are guaranteed by the government, and your loan documents will contain that information. Other loans are made through charitable and other non-profit programs. And even loans made directly by a bank, without any government paperwork associated with them, are usually made under a program “funded by a non-profit entity.” Many banks have set up non-profit subsidiaries, or separate non-profit companies, and the banks fund those non-profits, and if the payments on the loan fall behind, the non-profit buys the loan from the bank; in that way the bank funds the non-profit, and the non-profit helps fund the loan.

The only way to have your student loan discharged in a Chapter 7 bankruptcy is to file a separate proceeding with the court and prove that paying the loan would cause an “undue hardship.” Just being out of work, or not having enough income to cover your expenses, isn’t enough; you have to show that you have a long-term condition or situation that will prevent you from every making significant payments on the student loan. These cases include a physical or mental disability that prevents you from having steady employment, or possibly the need to care for a family member full-time that prevents you from working. Before you can ask for the court to discharge your student loan, you have to show that you have exhausted all the forbearance and payment relief programs offered by the lender or the government.

In a Chapter 13 repayment plan, you can ask the court to discharge the student loan, as described above; if this is not likely, you can either have some of the loan paid through the Chapter 13 (with the rest due after the plan has been completed), or make regular monthly payments during the Chapter 13, continuing after the plan is finished. Your bankruptcy lawyer can help you figure out which option is best for you.

There have been suggestions that the law should be amended to make it easier to deal with student loans in bankruptcy. Some members of Congress have made proposals to discharge all student loans, or to make student loans dischargeable in more cases. As of the writing of this article in early 2021, it is not clear whether any of those proposals will bear fruit; this article describes the law as it is right now.

If you have student loans, whether they were for your own education or a family members, and you are contemplating bankruptcy, make sure you discuss your situation with your bankruptcy lawyer to see if you have a way of discharging your student loan.