Can I discharge student loan debt in bankruptcy?

This post describes how to deal with student loan debt in bankruptcy.

One of the only types of debt that can't be discharged in a bankruptcy is a student loan, and even then, there are exceptions. But student loan debt in bankruptcy can be discharged in relatively rare situations of "undue hardship"--where the debtor cannot pay back the student loan and probably won't be able to pay it anytime in the future. Under Minnesota (8th Circuit) caselaw, courts consider: (1) The filer's past, present and future reasonably reliable financial resources; (2) a calculation of the reasonable living expenses of the debtor and his/her dependents; and (3) any other relevant facts surrounding the bankruptcy case.

1. How to discharge student loan debt in bankruptcy. To attempt to discharge student loans in bankruptcy, the debtor can file an adversary proceeding, which is a lawsuit-within-a-bankruptcy, against the student loan company. Starting an adversary proceeding is no biggie--there's no court filing fee, and you just file a summons and complaint and send it to the creditor. After that it's pretty much like any other lawsuit.

2. Undue hardship is based on your ability to earn money to pay off your loans.

  • - Determining undue hardship has a lot to do with your past and present earning power. The court will look at your job qualifications and earning history. If you have had a long history of low earnings, that might play in favor of discharge.

  • - Your ability to earn money in the future is even more important. The court may consider your future job prospects, especially as compared to the size of your loan. If there's no foreseeable way to make a dent in the loan, this will play in favor of discharge.

  • - Age may also be a factor. While a fresh-faced 22-year old has an entire life of indentured servitude ahead of him to pay his loans, a 65-year old may be considering retirement and won't have the same long-term earning potential.

  • - Disability also plays into the determination. Debtors with disabilities may have less earning potential in some cases. This is evaluated along a spectrum--a permanent and total disability that renders someone completely unable to work may be an easier discharge case, while a partial disability that reduces earning power will probably not be the basis for dischargeability on its own.

3. If there's no money in your budget, there's no money to pay off student loans. The court will look at your monthly income and reasonably monthly expenses, and determine if there's any room for repayment of student loans. If your monthly budget is in the red, this will play in your favor.

The court may also look at your eligibility for various loan repayment programs, such as Income Based Repayment (both for federal loans only). If you can afford to make a reduced payment, that might be a factor against discharge. But even if you can afford a reduced payment, it's not a discharge dealbreaker where the loan will continue to accumulate interest and grow even though you're making payments.

If you're struggling with student loan payments and you think some of the above criteria may apply to you, give us a call.