If you owe money to student loans, you don’t have many options when it comes to bankruptcy. Student loans cannot be discharged in a Chapter 7 or a Chapter 13 bankruptcy unless you can establish substantial hardship. Changes to the U.S. Bankruptcy Code in 2005 made even private student loans non dischargeable.
Outside of bankruptcy, a defaulted student loan can be rehabilitated, consolidated, stretched out or discharged due to disability. And if the school closed before you finished your studies, the loan may be unenforceable. But inside the bankruptcy court? Unfortunately, not much can be done.
The best you can do with in bankruptcy to help your student debt problem may be to wipe out your other debts, or use Chapter 13 to stabilize the repayment for a 3-5 year period.
So What Is Undue Hardship When It Comes To Student Loans?
Undue hardship typically means that you can’t maintain a minimally adequate standard of living and repay the loan. The rule, found in the Brunner case. requires a showing that the conditions that make repayment a hardship are unlikely to improve substantially over time.
How About Discharging Private Student Loans In Bankruptcy?
Sadly, no dice. The 2005 amendments to the Bankruptcy Code expanded the definition of student loans to include private student loans as well as the federally-guaranteed ones. This means that no student loan is dischargeable in bankruptcy unless the court finds undue hardship exists.
Section 523(a)(8)(B) of the U.S.Bankruptcy Code adopts the IRS definition of a qualified education loan found in 26 U.S.C. 221(d)(1), which says:
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).
If you want to try to discharge a student loan debt, you’ll need to bring an adversary proceeding and prove your case. I warn you in advance, though; proving undue hardship in New York is no easy task. Though it’s never a great idea to file your own bankruptcy case, doing so with the intention of getting your student loan debts wiped out is filled with even more difficulties.
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