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Student Loans in Bankruptcy

As a bankruptcy attorney, one of the most common questions I am asked involves how bankruptcy affects student loans.

The question is generally answered in Title 11 of the United States Code in Section 523(a)(8) which states that the following debts (student loan in nature) are not dischargeable in bankruptcy:  _____________________________________________________________________ (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—  (A)  (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or  (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

 (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual _________________________________________________________

What a bunch of legal mumbo jumbo.  When lawyers or doctors speak, they like to sound smart. One of the things that lawyers do to sound smart is add so many words to writings that it literally takes 5x as long to read what they are trying to say.

I have been dealing with student loan issues for clients for 15 years. Here is the bottom line. For 80% of people with student loans, unfortunately you are stuck with them. Bankruptcy will not deal with them at all. However, for 20% of the folks, there are some remedies.

In order to get student loans discharged, you need to have one of the following two reasons.

1. Minimum repayment of the student loan payments would cause you to be unable to provide basic necessities for you or your dependents. Basic necessities involves housing, food and utilities. So if you are claiming you cant afford a student loan payment, you better not have an expensive cell phone plan,  cable or anything that would be considered luxury in nature. You have a better chance of getting rid of big student loans where your repayment is $700-$1000 a month. If your repayment is $50/month, it would be hard pressed to argue that a small payment is what separates you from basic living.


2. The real catcher is to try to attack the student loans as being not a student loan as defined by section 221(d)(1) of the IRS code. Here is the text:

_________________________________________________________ (d) Definitions For purposes of this section— (1) Qualified education loan The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—  (A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred, (B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and  (C) which are attributable to education furnished during a period during which the recipient was an eligible student. Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of section 267 (b) or 707 (b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72 (p)(4)) or under any contract referred to in section 72 (p)(5). ________________________________________________________

This is where it gets very interesting.. What is a student loan? Say you borrow money as a student loan and pay it for tuition or books. Well, in such a case, that is definetly a student loan. However, what if you borrow money just for living expenses? So you get a non-subsidized Stafford student loan for $15k and 100% is used by you to pay for your housing, food or recreation. Even though it is a "student loan" I think a debtor could argue that it is not a "qualified student loan".

It is not appropriate for a bankruptcy attorney to make a general statement that there is nothing to do in bankruptcy with student loans. With a little investigation, you may be able to find a way to rid yourself of the obligations of crushing student loans. However, it will not be cheap.

Your bankruptcy attorney will quote you a flat fee to do your case. Whatever that fee is, it will not include litigating with your student loans. In order to get your student loans discharged, you have to file a lawsuit in your bankruptcy against them. This is where it gets expensive. Typically when I have sued the Department of Education or any student loan company, attorney fees can range from $3500-$10,000 depending on the time the case takes to resolve. This is again in addition to the normal fees just to process your case. Although it may cost you a lot to get the student loans discharged, you may be able to discharge hundreds of thousands of dollars in student loan debt.

The best rule is that the more student loan debt you have, the easier it is to possibly discharge. If you would like a consultation on how I can help you in bankruptcy, please feel free to contact my office at 757-301-3636

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