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Can a Student Loan be Discharged in Chapter 7 Bankruptcy?

Written by: Kristy Welsh

Last Updated: August 18, 2017

The topic of student loans and student debt is now at the forefront of the conversation about overall consumer debt in America. Student loan debt is now larger than credit card debt with a collective $1.4 trillion burden of debt and student loan delinquency rate is now 11.2 percent (90+ days delinquent or in default). It is no wonder the question of whether or not student loans can be included in a Chapter 7 bankruptcy comes up all the time.

Private student loans are generally non-dischargeable in a Chapter 7 bankruptcy. That being said, on February 6, 2013, U.S. Congressmen Steve Cohen (D-Tenn.) introduced H.R. 532: Private Student Loan Bankruptcy Fairness Act of 2013, which proposed amending the U.S. Bankruptcy Code to modify the ability to discharge certain debts for educational payments and loans. This particular bill died in Congress but Congressman Cohen re-introduced the same concept in H.R. 2527: Private Student Loan Bankruptcy Fairness Act of 2017. This bill is currently in the House under debate.

Can a Student Loan be Discharged?

It used to be that private student loans could be discharged in bankruptcy. But, after the signing of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, Congress stated that student loan borrowers would be required to file an "adversary proceeding" (a type of lawsuit within a bankruptcy case) to prove undue hardship in order to get their loan forgiven. Even being able to do this, many people have thought it darn near impossible to discharge their student loan and don't even try. This has left many just living with this overwhelming burden of debt.

Jason Iuliano, a Harvard Law School professor, took a closer look at student loan discharges in bankruptcy and his findings were shocking. He found four out of 10 people who attempted to discharge their loan were successful. That may not seem like great odds, but everyone once thought their chances were nil at best. The most shocking finding was that 99.9 percent of student loan debtors in bankruptcy never even tried to get a discharge.

Proving Undue Hardship

The number one reason a person will be successful in getting their student loan discharged is being able to prove undue hardship. In a Chapter 7 bankruptcy, an undue hardship has these characteristics:

  1. The debtor is less likely to be employed.
  2. The debtor is more likely to have a medical hardship.
  3. The debtor is more likely to have lower annual incomes the year before they filed for bankruptcy.

Furthermore, in order to pursue a successful claim to discharge the loans in bankruptcy, the debtor should be able to show;

  1. a current inability to repay the loans,
  2. a future inability to repay the loans, and
  3. a good faith effort to repay the loans.

If you can successfully prove undue hardship, your student loan will be completely canceled. If you cannot prove due hardship, you might want to consider repaying your student loans through a Chapter 13 bankruptcy plan. As always, it is best to get advice from a qualified bankruptcy attorney so you understand and can take full advantage of your options.