Discharge a Student Loan
- 4 min read
- Student loans are usually not discharged by a Chapter 7 or 13.
- Student loans can be discharged under limited circumstances.
- The "undue hardship" rule is in a state of change.
Learn When You Can Discharge a Student Loan In Bankruptcy
Due to bankruptcy reforms in 1998 and 2005, it is almost impossible for an average, non-disabled person to discharge federal or private student loans through bankruptcy. You may be able to get help with your payments through a bankruptcy filing, but there are better options for repaying your student loans.
The Student Loan Bankruptcy Exception
As with all rules there is one exception: you can discharge a student loan in bankruptcy due to undue hardship. Undue hardship is defined as the permanent physical inability to work. You must prove in bankruptcy court:
- You are physically unable to work
- You are likely to be unable to work for most of the loan term
- You made a good-faith effort to repay the debt
- Paying it would prevent you, your spouse, and your dependents from maintaining a "minimal" standard of living.
If you believe you qualify under these guidelines, see an experienced bankruptcy lawyer for help filing an adversary proceeding as part of your bankruptcy case. The undue hardship rules are in a state of change, so do not give up on bankruptcy if you have some type of hardship.
How Bankruptcy Can Help with Student Loans
Although your student loan can't be discharged in bankruptcy, a bankruptcy court may be able to ease an overwhelming debt burden. Some courts may discharge a portion of your student loans, but this is rare and varies by court.
The total outstanding balance of student loans was $1.03 trillion as of September 2013. The 90-day or more delinquency rate at that date was 12%. By comparison, the delinquency rate was 6% in 2003. (Source: Federal Reserve Bank of New York)
In most cases, the judge will incorporate your student loans into your debt repayment plan under Chapter 13 bankruptcy. Any balance remaining after the payment plan ends will still be due, but your other debts should be paid off by then.
What to Do if You Are Heading Toward Bankruptcy
If your total debts have reached an unsustainable level and you feel you must file for bankruptcy, don't simply stop paying your student loans. Not only are student loans not dischargeable in bankruptcy, but also the federal government has the right to assess stiff penalties, seize tax refunds and other government assistance money, and garnish your wages.
Lenders want to help you avoid default. Contact them for help applying for a deferral, forbearance, or extended repayment plan before the situation gets worse than it already is.
Solutions for Student Loans You Do Not Owe
If a lender is demanding payment for a student loan you don't think you owe, it's best to resolve the situation before you wind up in bankruptcy court.
In 2012, the average debt load for college graduates was $29,400 per student. About 7 out of 10 seniors carry student loan debt. (Source: College Access & Success Project on Student Debt)
The most typical situation is a miscalculation of the actual loan balance, especially if the loan has changed lenders multiple times. If you think the lender is requesting more than you owe or hasn’t properly credited payments, write to them with your evidence. If the issue is not resolved, then a court can intervene to determine the amount you actually owe. A bankruptcy judge may also do this as part of a bankruptcy proceeding.
Your debt may be canceled if one of three situations apply:
- Situation 1: Your school closed before you completed your education and you couldn't complete it elsewhere. You don't qualify if you voluntarily withdrew before the school closed. You may be entitled to a loan reduction if you voluntarily withdrew and the school improperly withheld any remaining student loan funds.
- Situation 2: Your school or another party signed the promissory note in your name without your approval or the school falsely certified you as eligible for a student loan when you were not.
- Situation 3: You were forced to withdraw due to a disability that developed while you were in school, or that certifiably worsened after you accepted the loan.
For all three situations, it is best to contact the lender or the federal student loan program for assistance in resolving your un-owed debts. Although a bankruptcy court can sort it out for you, other solutions are simpler and better for your financial future.
Student Loan Cancellation Programs
|More About Student Loans|
|Need a Student Loan? Start Here!|
|Student Loan Consolidation|
|Private Student Loan Default|
|How to Pay Off a Student Loan|
|Help with Your Student Loan Debt|
|Settle a Private Student Loan|
|Public Service Loan Forgiveness|
Several federal and state agencies offer programs to help you cancel or reduce all or a portion of your student loan debt without filing for bankruptcy. Most programs involve teaching, nursing, or military service. To learn more about available programs and how you can apply, visit the Federal Student Aid Forgiveness, Cancellation, and Discharge Web page.
In most cases, bankruptcy will not erase your student loans. Although bankruptcy is still a viable solution for desperate financial situations, it is best for your future financial well being to avoid it. Contact your loan servicers as soon as a problem develops to avoid worse financial repercussions.
Did you know?
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q4 2022 was $16.91 trillion. Student loan debt was $1.60 trillion and credit card debt was $0.99 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Each state has its rate of delinquency and share of debts in collections. For example, in District of Columbia credit card delinquency rate was 4%, and the median credit card debt was $329.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.
You asked about student loans and bankruptcy. Bankruptcy courts follow current rules, and not the rules that may have been in place when the debt was incurred. In other words, the fact the loan was from before the bankruptcy law changed in 1978 does not matter. Consult with a bankruptcy lawyer in your state to learn if the debt is considered a hardship under today's rules.
See the Dept. of Education's Federal Student Aid Forgiveness, Cancellation, and Discharge Web page to learn more about federal student loan cancellation programs.
I suggest that you take all of your medical records and meet with a bankruptcy attorney.
I can't give you legal advice, but the fact that you were adhering to a payment plan worked out with a duly appointed debt collector may give you grounds to argue that the fact that the collector was let go does not mean that your agreement is voided.