Student Loans and Bankruptcy

One of the most commonly asked questions by individuals considering a bankruptcy petition is whether student loans are dischargeable debt.  Unfortunately, the quick answer to this question is no.  Prior to the Bankruptcy Abuse Prevent and Consumer Protection Act of 2005 (BAPCPA), private student loans were dischargeable in bankruptcy proceedings.  A private student loan is an education loan that is not guaranteed by the government.  Prior to the BAPCPA in 2005, private student loans were treated like other unsecured debt and readily discharged.

After the BAPCPA was enacted, private student loans became more prolific.  Not a day goes by where consumers don’t see or hear a commercial for companies, both big and small, offering private student loans with amounts of up to $40,000 per year.  Since these loans are now secured, in an indirect way, the banks stand to gain substantially by lending the money to students.

 It is not unheard of for a $40,000 student loan to balloon to over $100,000 in a few short years if no payments are made.  The penalties and compounding interest make this type of student loan difficult to repay for many college graduates.  Government-guaranteed student loans have a much lower annual maximum, currently $10,500 for college juniors or seniors.  While these loans are still not dischargeable in bankruptcy, they are much easier to repay than private loans.

There is one small caveat to the student loans and bankruptcy question.  In the case of severe and unchanging hardship, it is possible to have some or all of your student loan debt discharged.  The only way to do this is to prove an undue hardship on the filer’s behalf without the possibility of the financial situation changing.  If this route is going to be taken, then an adversary proceeding must take place.

According to the US Courts website, an adversary proceeding is “a lawsuit arising in or related to a bankruptcy case that begins by filing a complaint with the court, that is, a “trial” that takes place within the context of a bankruptcy case.”  If your student loans are causing an undue hardship, and will do so even after the rest of your debt has been discharged, it is important to find a bankruptcy attorney that is knowledgeable with adversary proceedings and the procedures needed to make an undue hardship determination.

Source:  US Courts Commonly Used Terms