With $1.5 billion in student loan debt, many observers believe the economy would get a boost if at least some of that debt could be discharged in bankruptcy, like almost all other consumer debt. The excuses used for treating federal and private student loans differently in bankruptcy start to crumble when you look at how other debt is treated, even loans owed to other government agencies. A borrower can easily discharge in bankruptcy an unsecured loan to the Small Business Administration or the U.S. Department of Agriculture but loans owed to the Department of Education receive special treatment. When the burdens to individuals and the broader economy are considered, the reasons for not being able to discharge student loans lose their logic.
It wasn’t always the case that student loans couldn’t be discharged in bankruptcy. Over the years Congress has adopted several laws placing more restrictions on when student loans could be discharged. Before 1976 all student loans and debts for education could be discharged in bankruptcy, just like any other consumer debt. In 1976 Congress prohibited the discharge of federal student loans within the first five years of the loans coming due, unless the borrower could prove an undue hardship. In 1979 limits were placed on the five year waiting period and in 1984 student loans made by nonprofit organizations were made nondischargeable. In 1990 the waiting period was pushed to seven years and a provision making scholarships, grants and education benefits like VA benefits nondischargeable. Later Congress made the discharge of student loans and educational debt even harder by eliminating the waiting period and making private student loans nondischargeable if they meet the tax code definition of a “qualified education loan.”
While Congress has made it more difficult to discharge student loans in bankruptcy there are still a few opportunities:
- If you have loans owed to or guaranteed by a government or a nonprofit you can only get the loans discharged in bankruptcy by showing an undue hardship. The “undue hardship” is decided on a case by case basis and requires the borrower to bring a separate proceeding in the bankruptcy seeking discharge. This separate proceeding can add hundreds or thousands of dollars to the cost of the bankruptcy. See https://thompsonlawoffice.net/535/discharging-student-loans-bankruptcy/.
- If you owe funds received from a scholarship or educational benefits such as VA benefits you can get the obligation discharged by showing an undue hardship. This will again required a separate proceeding be brought within the bankruptcy.
- If you owe private student loans that don’t meet the definition of a “qualified education loan” they will be dischargeable in bankruptcy. See https://thompsonlawoffice.net/555/student-loans-bankruptcy/.
- Educational debts that aren’t the type of loans, benefits, scholarships, etc. described in the code should be discharged.
If you’re uncertain about whether your educational debt could be discharged contact us through this website.