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Student Loan Debt: The Bankruptcy Filer’s Gordian Knot

The price of higher education has skyrocketed in recent years, rising at a rate that far outpaces inflation. Today’s graduates of four-year universities carry more debt than any previous generation: according to a recent report from the Project on Student Debt, 2011 college graduates with loans had a record average debt load of $26,000.

The combination of a slow economy and massive student debt can be a financial catastrophe for recent grads. Normally, filing for bankruptcy is a lifeline that can help those overwhelmed by debt get a fresh start. But, if student loans are the cause of your financial problems, you may have a tougher row to hoe than those with other forms of debt.


In a Chapter 7 bankruptcy, most forms of debt are discharged almost immediately, meaning you will no longer have any obligation to pay them back. In a Chapter 7 bankruptcy, some filers must surrender property to partially satisfy debts, but many Chapter 7 filers do not own valuable enough assets to have to surrender property (generous exemptions exist for things like homes, cars and personal effects). A Chapter 13 bankruptcy, on the other hand, involves the consolidation of debts under a court-approved plan, with full or partial repayment made over a three to five year term. There is no surrender of property in Chapter 13, and at the end of the repayment term, most types of remaining debt are fully discharged.

Up until the mid-1970s, student loans could be discharged in bankruptcy just like any other kind of debt. However, amid reports that some students were declaring bankruptcy immediately after completing college or grad school, Congress changed the law in 1976, making it harder to eliminate student debt through bankruptcy.

To protect taxpayer money lent out in federal student loans, Congress again tightened applicable bankruptcy laws in 1990 and 1998; in 2005, these provisions that covered federal loans were extended to for-profit lenders that borrow to students.

In today’s legal climate, student loans may only be discharged in bankruptcy if the debt subjects the borrower to “undue” financial hardship. Usually, bankruptcy judges take this to mean that student debt can only be eliminated if the borrower has done everything in his or her power to try to repay the debt, and there is little hope that the borrower will ever be in a strong enough place financially to make regular loan payments.

It is considered extremely difficult to win an undue hardship argument. For that reason, hardly anyone even tries; the New York Times estimates that fewer than 1,000 people file undue hardship claims each year (while around 3.5 million borrowers default on their student loans every year).

Yet, for those who do file, there may be hope. A study in the American Bankruptcy Law Journal – the most comprehensive of its kind – examined 207 undue hardship proceedings, and found that 39 percent of filers eventually received a full or partial discharge. The report suggested that as many as 69,000 more people a year should try to make a case for undue hardship based on the potential risk and reward.


Even if bankruptcy cannot help you with student loan debt, it can easily eliminate other debts, without which it may be easier to keep up with your student loan payments. And, there’s always a chance that you have a strong argument for undue hardship.

If you’re facing unmanageable debt, talk to a knowledgeable bankruptcy attorney today to explore your options.