To “discharge”–legally write-off—a student loan in bankruptcy you have to show “undue hardship.” What does that take?
The total amount of student loan debt in the U. S. surpassed $1 trillion dollars ($1,000,000,000,000.00) a couple of years ago. For many people it is their biggest debt. For others the burden of student loan debt is preventing them from buying a home. Student loans are a large part of why for the first time in many generations many people fear that their financial well-being will be worse than that of their parents. Student loans are threatening the American Dream.
It All Turns on “Undue Hardship”
The relevant part of the Bankruptcy Code states that a student loan is only discharged if it “would impose an undue hardship on the debtor and the debtor’s dependents.” What does that mean?
Congress didn’t explain what would is a “hardship,” nor the difference between an ordinary “hardship” and an “undue” hardship which would get you out of paying a student loan.
“Undue” means “unreasonable; going beyond the limits of what is normal.” So Congress seemed to say that while you cannot discharge a student loan that is causing you a hardship, you can if is causing you an abnormal, unreasonable hardship.
But that still doesn’t help much. Practically speaking how can you tell if the hardship caused by your student loan is abnormal or unreasonable?
Court-Devised Three-Part Test
During the last several decades that this statute has been on the books, bankruptcy courts all over the country have tried to apply this “undue hardship” standard. Although there are some subtle differences among courts in different regions of the country, there is a general consensus that you must meet three conditions to qualify for “undue hardship”:
1. If you were now required to pay on the student loan, under your current income and expenses you would be unable to maintain even a minimal standard of living.
2. Your current inability to maintain a minimal standard of living while repaying the student loan is expected to stretch out over all or most of the loan repayment period.
3. You had previously made a meaningful effort to repay the loan, or to qualify for appropriate forbearances, consolidations, and administrative payment-reduction programs.
#1: Meeting all three “undue hardship” conditions is not easy. Most people’s student loans don’t qualify. It often takes careful planning with the help of an attorney experienced in discharging student loans.
#2: With many kinds of debts which might not be discharged in bankruptcy the burden is on the creditor to challenge the discharge of the debt. But with student loans the burden is on the borrower to raise and show “undue hardship” during the bankruptcy case. Otherwise the student loan will continue to be owed.
#3: “Undue hardship” has to be shown through an “adversary proceeding,” in effect a lawsuit within a bankruptcy case that is ruled upon by the bankruptcy judge.
#4: If your hardship is progressive in nature—through a worsening physical disability, for example, you may not qualify for “undue hardship” until well after your bankruptcy case is completed. If so, you may be able to reopen your bankruptcy case so the bankruptcy court can make that determination. Or another option may be to file a Chapter 13 case, which generally lasts 3 to 5 years, and only try to qualify for “undue hardship” towards the end of your case. That may allow you to avoid making any payments on the student loans for the first few years of the case, and then take the opportunity to discharge the student loan only when the facts of the case better support doing so.