Can You Include Student Loans In Bankruptcy?

One of our readers asks “Can you include student loans in bankruptcy?”. Well, the answer is complicated: Yes and no. Student loans are normally not included when claiming bankruptcy, and can only be included in bankruptcy when there is what’s called an “undue hardship”. An undue hardship is legally defined as “special or specified circumstances that partially or fully exempt a person from performance of a legal obligation so as to avoid an unreasonable or disproportionate burden or obstacle”. In layman’s terms, this is a “special exception” granted to you by a bankruptcy court. Out of the 72,000 cases of bankruptcy in 2008, only 29 (or .04%) got their student loans dismissed.

The only way to get rid of a student loan after a bankruptcy claim is to file for undo hardship. Filing for undue hardship is is separate from filing bankruptcy and requires you and your lawyer to meet with a judge to prove that you should be granted a special exception. There is certainly no such thing as fast debt solutions and the arduous process of declaring bankruptcy and filing for undue hardship is another illustration of that.

Legalese of an Undue Hardship

Three conditions need to be met in order to prove an undue hardship and get student loans discharged in bankruptcy:

1.  That you cannot keep a “minimum” standard of living while repaying your loans;

2.  That you are unlikely to increase your income in the mid-term (next 10 years); and

3. That you have made an honest effort to pay off your loans.

Examples of Undue Hardships

There have been a few notable cases of people discharging their student loans while going bankrupt. One man was in his late 50′s, had income equal to his expenses, and thus could not pay for his education loan – he got a judge to agree that his income would not increase by the time he was to retire. Other courts have discharged student loans when the school was discredited or if the student could prove that their education was worthless. There have also been cases where a borrower’s mental health was proven to contribute to their persistent financial hardship. Generally speaking, though, it’s tough to prove these exceptions.

Changes In Bankruptcy Law

You used to be able to include private student loans in bankruptcy, but that was changed in 2005. There have also been recent bills introduced in Congress which intend to help alleviate student loan debt and modify the rules regarding student loans and bankruptcy, but those have not become law as of this writing.

To find out if the personal bankruptcy process is right for you, consider filling out our free bankruptcy evaluation.

Click on the following link to learn the answer to the question “Can you claim bankruptcy on student loans?”