The law excluding student loans from discharge refers to loans that are made, insured, or guaranteed by the government, or made under any program funded in whole or in part by the government or by a nonprofit institution. The most recent amendment to the law expanded the definition to include any education loan that qualifies for a tax deduction, regardless of whether the loan is made, insured, or guaranteed by the government. Thus, most education loans cannot be discharged (wiped out) in a bankruptcy. The one exception might be a personal loan from a private institution, which happened to be used to fund an educational program. However, those are few and far between.
So how do we deal with them in bankruptcy?
Currently, the only exception to the nondischargeability of student loans is the rare occurrence when making the loan payments results in an “undue hardship” upon the debtor or the debtor’s dependents. This is not any “undue hardship”, but instead requires that the hardship is severe and is most likely to continue for the foreseeable future. Many courts have adopted a standard test to determine if a debtor’s situation is grave enough to constitute an “undue hardship” so as to justify the discharge of a school loan debt:
1. the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and his dependents if he is forced to repay the student loans;
2. there are additional existing circumstances indicating that this state of affairs is likely to continue for a significant portion of the repayment period of the student loans; and
3. the debtor has made a good faith effort to repay the loans.
Most people who are successful in having their loans discharged through this test have relatively low incomes or exceptionally high expenses due to misfortune, disability, or other calamity. They have a lack of job skills or lack of job opportunities in their area, and factors exist that make it unlikely that their employment prospects and earnings will improve in the future. Further, they can show that they made some effort to repay the loans, or at least that they made some effort to deal with the loan prior to the bankruptcy.
Thus, in all but extreme cases, your student loans are going to stay with you even if you get your bankruptcy discharge. However, filing a bankruptcy still may be your best bet in dealing with your student loans.