LOS ANGELES BANKRUPTCY BLOG
Discharging Student Loans
Sep 30, 2010
There was a time when student loans were able to be discharged if the borrower had at least seven years during which payments were due under the student loan. In 1988, Congress amended the Bankruptcy Code to eliminate a debtor's ability to discharge student loans based on the mere passage of time.
In 2005, as part of the major amendments to the Bankruptcy Code known as BAPCPA, the law was changed so that all student loans became generally nondischargeable, including student loans from private lenders. There is still a limited discharge available with respect to student loans, which is the "hardship discharge" in Bankruptcy Code Section 523(a)(8) The bankruptcy court is only allowed to discharge student loan debt when not doing so "would impose an undue hardship on the debtor and the debtor's dependents". Undue hardship is the key and must be specifically proved by the debtor in bankruptcy before the debt can be discharged.
In the Ninth Circuit, which includes California, bankruptcy judges will look at the following tests to determine whether undue hardship exists:
1. That the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for the debtor and the debtor's dependents if forced to repay the loans;
2. That additional circumstances exist indicating that this state of financial affairs is likely to persist for a significant portion of the repayment period of the student loans; and,
3. That the debtor made a good faith effort to repay the loans.
Bankruptcy courts do have the authority to issue partial discharges of student loans, in cases where the debtor shows the ability to repay some, but not all, of the loan. All three of the hardship tests must be still be met.
Finally, for a debtor to seek an "undue hardship" discharge of a student loan, he or she must file an adversary proceeding, which is a separate lawsuit within the bankruptcy case. This is hard to do without an attorney, expensive to do with an attorney, and these lawsuits are almost always contested by the lender, or the federal government, if the loan is a federal student loan. However, federal student loans can be discharged outside of bankruptcy for total and permanent disability.
