The Relationship Between Student Loans and Bankruptcy

For many Americans, student loans are a part of their monthly expenses. They are a "good debt" incurred in order to attend college or graduate school in an effort to further one's career. But, for unemployed educated-workers, student loans are just another burden contributing to a stressful financial situation.

Bankruptcy often allows individuals to discharge or restructure the debts, such as credit card debt or medical bills, that are weighing them down. Student loans, both private and federal, however, are non-dischargeable in bankruptcy, but this wasn't always the case.

History of Student Loans and Bankruptcy

Since 1978, federal student loans have been non-dischargeable in bankruptcy. According to a release by Senator Dick Durbin (D-IL), this was to protect the government's investment in higher education. But, private student loans remained dischargeable in bankruptcy, offering some relief to those hurting financially.

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was passed, putting private student loans on par with their federal brethren - non-dischargeable in bankruptcy - with one exception, proving undue hardship.

Undue Hardship

By proving undue hardship, debtors are able to eliminate their student loan debts in bankruptcy. There are three parts to proving undue hardship, a debtor must show:

1. By repaying student loans, a debtor is unable to maintain a minimum standard of living
2. The current financial difficulties are likely to continue for majority of the life of the loan
3. An honest effort was made to repay the student loans

However, short of a long-term disability, undue hardship is extremely difficult to prove, and is likely not an option for most debtors. Though, there are still options for those struggling to make their student loan payments.

Options

Most student loan lenders offer repayment options for those finding it difficult to make payments. Money-Zine.com outlines a few of the options, including:

• Deferment - allows the student loan, under certain circumstances, to be "put off" or suspended for a period of time
• Consolidation - combining student loans into a single monthly payment, often lowering the amount owed on a monthly basis
• Forbearance - is the temporary reduction in or postponement of payments for a period of time

Bankruptcy may also be an option. While student loans cannot be discharged, bankruptcy may be able to eliminate other debts, which will free up money to make student loan payments.

If you are finding it difficult to make ends meet, speak with a bankruptcy attorney about your situation and to learn of the debt relief options that may be right for you.

David J. Hernandez is a lifetime member of the Million Dollar Advocates Forum and is a New York Super Lawyer.

He served as the 50th President of the Puerto Rican Bar Association; the NY Hispanic Bar Task Force on Judicial Selection Committee; and the NYS Conference of Bar Leaders.

He serves as a member of the Judicial Screening Committee and Committee on Character and Fitness for the Second Department; the Advisory Committee on Civil Practice to the Chief Administrative Judge; NYSBA House of Delegates and Grievance Committee of the Brooklyn Bar Association.

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