After several years of struggling to pay mounting debts, a debtor has decided to file a petition for Chapter 7 "straight" bankruptcy. The debtor, who has two preschool age children, has determined that he simply does not have adequate income and assets to repay his debts in the future. This is why he choose not to file for Chapter 13 "reorganization" bankruptcy. Starting in 1987, the debtor took out a number of student loans while he was in college. He continued to take out student loans through graduate school. The amount due on these loans, including interest, is by far the largest debt that he owes. The debtor is hopeful that he will be able to "discharge" or get rid of the student loans as part of his bankruptcy proceeding. He recalls hearing, at one time, that older student loans are readily wiped out in bankruptcy.

Are student loans dischargeable in bankruptcy?

In a proceeding under Chapter 7 of the Bankruptcy Code, it is presumed that many debts, including most loans, will be discharged or "wiped out." Section 523(a)(8) of the Bankruptcy Code, however, provides that student loans cannot, for the most part, discharged in a bankruptcy proceeding under Chapter 7. A debtor would have to convince a bankruptcy court that paying the student loans would cause undue hardship to the debtor and his dependents; this is a difficult burden of proof. When the debtor is unsuccessful in convincing the bankruptcy court that undue hardship would result, he must attempt to repay the student loans. Put another way, student loans are nearly almost always considered to be nondischargeable debts.

Prior to 1998, it was easier to discharge student loans in bankruptcy. Congress, however, changed the law in an attempt to make it more difficult to discharge student loans through Chapter 7 bankruptcy proceedings. It is likely that the debtor in the earlier scenario is thinking of the previous law. It is also possible that he is thinking of a prior law. When he was graduated from college in 1991, there were two grounds on which student loans could be discharged. The first is in the case of an undue hardship. The second was if the payments had first become due seven years prior to filing for bankruptcy.

What is considered to be an "undue hardship?"

"Undue hardship" is determined in a discretionary manner by bankruptcy courts. This means that there is no one single standard that is applied. Generally, an undue hardship discharge is available only when the debtor would be reduced to poverty for the life of the loan. When a debtor has, in good faith, tried to repay a student loan but has been unable to fully repay it due to circumstances beyond his control, this may be considered to be an undue hardship. Some bankruptcy courts have held that student loans could not be discharged where the debtor fails to prove that her future financial situation is hopeless.

A bankruptcy court may very well deny a debtor's request to discharge his student loans when his spouse's income is adequate to pay the family's expenses. This may be true even if the debtor has no income of his own. Undue hardship is based on both spouses' income and expenses. A debtor who does not attempt to repay student loans in good faith is unlikely to be granted a discharge based on undue hardship.

What if the student loans are old?

The age of a debtor's student loans is usually not a factor. No matter when the student loans were taken out, they are usually not dischargeable in bankruptcy unless the bankruptcy court finds that the debtor has proven the necessary undue hardship.

In the scenario involving the debtor who has filed for Chapter 7 bankruptcy, it appears unlikely that his student loans will be discharged for reason of undue hardship. Perhaps there are additional information and circumstances that would make it more probable that he could prove that he and his dependents would suffer undue hardship if he is forced to repay the student loans.

Can student loans be included in a Chapter 13 reorganization?

Chapter 13 of the Bankruptcy Code allows a consumer or individual debtor to reorganize his or her debts. Through reorganization, the debtor plans to repay as much of his or her debts as possible. Student loans can indeed be included within a Chapter 13 debtor's bankruptcy estate, as are other debts such as a mortgage and credit card debts.

Copyright 2006 LexisNexis, a division of Reed Elsevier Inc.