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Bankruptcy can help with student debt

Despite what you may have heard, the truly desperate can have their student loan debt forgiven in bankruptcy court. But it's not easy.

By Karen Datko Sep 5, 2012 2:17PM

Image: Man holding out empty pockets. (© Dougal Waters/Photodisc/Getty Images)Whenever you read about the immense amount of outstanding student loan debt in this country, you invariably read that student loan debt cannot be discharged in bankruptcy court. 


Well, that's not quite the case. A discharge of student loan can be done if your circumstances are sufficiently and demonstrably dire. You also have to prove to the court that there's no reason to hope that they'll get any better for the life of the loan, according to an excellent Ron Lieber story in The New York Times.


In other words, bad luck and hard times are your lot in life, and you must convince the judge of that fact.


It didn't used to be that way. Student loan debt was dischargeable in bankruptcy before the mid-1970s. Then Congress began gradually tightening the rules for federally guaranteed student loans, and it finally eliminated bankruptcy discharge for private student loans -- including those issued by banks -- in 2005. ( has an interesting timeline of the changes here.)


"That essentially lumps student loan debt in with child support and criminal fines -- other types of debt that can't be discharged," Kayla Webley observed earlier this year on Time.


(While programs exist to forgive or reduce federal student loan payments, those options aren't available for students who took or take on private student loan debt. That's why people who are advocating a change in the bankruptcy laws are focusing on making private student loans dischargeable in bankruptcy.)


If you borrowed it, you have to repay it -- unless you can prove to the bankruptcy judge that your student loans are causing an "undue hardship" for you and your dependents. How do you make your case? (Post continues below.)

A federal website that explains ways to have federal student loan debt canceled, forgiven or discharged explains the bankruptcy courts' three-part test (and you have to meet each and every one of these):

If you are forced to repay the loan, you would not be able to maintain a minimal standard of living.
There is evidence that this hardship will continue for a significant portion of the loan repayment period.
You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in repayment for a minimum of five years).

Many judges have adopted a "certainty of hopelessness" test, Lieber writes, which requires them to believe that you truly have no hope of earning an adequate living now and for years to come.


These cases can drag on for years, and the government may fight you every step of the way. (A Palm Beach Post story this week, by the way, detailed how the feds have greatly increased the number of lawsuits they file against student loan defaulters.) The Times story focuses on a 31-year-old college grad, now legally blind, who first went to bankruptcy court six years ago. He's seeking the discharge of $89,000 in student loans.


The good news is, studies mentioned by the Times show that 39% or more of undue hardship applicants are successful in getting part or all of their student loan debt forgiven. Fewer than 1,000 people try it each year, the Times says.


The only case we could find: A bankruptcy judge discharged $340,000 in student loans owed by a woman who can't work because of Asperger's syndrome.  


What do you think? Should bankruptcy be restored as an option for those unable to repay their student loans -- either private loans or those guaranteed by the federal government? Should bankruptcy standards be relaxed to help the unfortunate?

Some don't think so, at least not for federal loans. Wrote one reader of the Times:

Many people are financially handicapped for life by no fault of their own. However, if you choose to take the risk inherent in taking out a loan, you do not fall within this group. You took a risk. You took someone else's money and agreed to pay it back with interest. Other taxpayers who did not take that money should not have to pay for you.

More on MSN Money:


Sep 5, 2012 6:34PM
Pay it back.

My husband and I will have paid back over 100k once we finally pay it back ( in 7 years). Our debt load is manageable, we just have to say no to a lot of things.

Just because my husband took the long way through college about 80k, does not make it necessary for the tax payers in America to pay for his Immaturity at the time.

If you can't pay it back- or wont pay it back. Don't go to school. People need to have some personal responsibility. There are too many cry babies. I can tell what 50% of my friends had helicopter moms as they grew up... They can't tie their shoes without asking a question. Parents need to educate and give tools to their youth and let them make some mistakes when they are younger than college age. It is not helping our lives or the future of America to have complacent idiots as the next generation. If you want to blame someone... take a look in the mirror. It isn't Obama or Romney. Wake up!

Sep 5, 2012 6:07PM
Independent Voter. Pay your loans back. Let's fix the system. Just a suggestion, if you declare a major in teaching and you know the median teacher income is $39,000 cap the borrowing there, Engineering major median income $62,000 cap the borrowing there, basket weaver income $15,500 cap the loan borrowing there, going on to be a doctor or lawyer and have to get a biology degree or liberal arts undergrad degre, cap the undergrad loan for those majors at the median $26,500. You get the picture, loan the amount of a perspective graduates entry salary for a perspective major. Go on to Grad school and look at extended the amounts loaned to individuals. I paid my loans back years ago, so I am free of that debt and it was well worth it. It is not democratic or republican, it is American.
Sep 5, 2012 5:59PM

Please, there's an easier way to deal with this. If the person is living in poverty, or somewhere around the poverty line, then they can be forgiven their loan.


If they ever file a tax return that shows the have risen above the poverty level, a red flag goes up and they get a letter from the government saying the must resume paying their student loan. If they only remain above the poverty cut-off line for a while, they can prove to the government their new status and go back to being forgiven (this must be made a difficult process).


If you let all these people who cranked up these outrageous loan amounts get off scot free, it will just add to the nation's problems. You are aware of all the doctors and lawyers who will take time off (or work for free) until they get their loan forgiven, and then go back to work making big money. You know this will happen. That's why we need the tax return rule. If they star making enough to repay the loan, their status changes, and they become payers, not takers.

Sep 5, 2012 5:53PM
You can discharge a student loan if you become permanently disabled and are unable to work to pay the loan back.
Sep 5, 2012 5:49PM

The rules are fixed for the poor. If this damn country is willing to give banks bailouts, then give a bailout for students you told would be better off if they got that bullsh!t piece of paper that sent them into slavery and has sent our nation into 1 trillion in debt.

You know what...those that disgree; stay on your high horse of moral ineptitude. When random shootings occur by people that feel spiritually bankrupted over the matter don't come knocking at my door for help or talking about a national tragedy. It all good when the human valuation of inequity is beset on the poor and unfortanate. However, there is a consequence for that.


Sep 5, 2012 5:45PM
Let's kill Sallie Mae - no federal guarantees on these loans!  This will greatly diminish the availability of loans and thus allow fewer students the opportunity to get an "education".  What will this do to the colleges/universities with their overpriced curriculum, faculty, and administrators???  It will drive down the overpriced cost of a college degree by forcing price reductions for tuition with concurrent cost cuts internally at the schools. More students will then become able to privately afford a higher education at a lower price.  Sounds simple and it is. But, once again - the liberals got this monster called Sallie Mae passed into legislation and look at the results!!  Remember the housing fiasco with Freddie Mac and Fannie Mae!!    PLEASE PLEASE PLEASE LET'S GET THE GOVERNMENT OUT OF OUR LIVES !!!
Sep 5, 2012 5:42PM

Pay back the loans and man and women up about it.


No freebees for anyone. Stop the madness and the ObamaWorld tactics.

Sep 5, 2012 5:31PM
NO Freakin way!!!!!!!!! play you pay !!!........opens up the door for career students!!
Sep 5, 2012 5:19PM

So its ok for 1%er Donald Trump to file bankruptcy a million times but you all are whinning about helping the under/non employed student with private student loans?!?!?!?!?!? And let's not forget that the underemployed graduate, that is barely getting by, is ALSO a TAXPAYER too.

Sep 5, 2012 5:12PM

NO student loans shouldn't be discharged.  There should be limits on how much a person is allowed to borrow.  The limit should  be a limit on how much can be borrowed.  Majoring in art history....limit is $1000.  Mechanical Engineering.......$40,000 or less, because in my opinion a lot of things that students believe are necessities really aren't. 

Sep 5, 2012 4:59PM
Taxpayers are granting you a loan, in hopes that you will graduate, get a good paying job, and add to the economic well being of the future economy.  If you don't pay it back, you are giving the finger to the very people who helped you.  If you take out loans for degrees which pay nothing or keep switching degrees because you can't make up your mind, then that is your problem and not the taxpayer. Yes, there are loopholes for taking bankruptcy.  But believe me, you will have a major court battle on your hands and it will take years to get settled.  In the meantime, they'll take every tax refund and any other federal payment to which you might have been entitled.  I am a liberal democrat, but I believe that if you take out student loans you should pay them back. Period.  I did and so does the greater majority of students.  For heaven's sakes, grow up and be an adult!
Sep 5, 2012 4:54PM

look, you can get a federal loan deferment if you're in a hardship situation.


the feds are paying interest on th loans for an indefinate time. i got a 1 year deferment on federal student loans i took out in 1991.


contact your loan servicer. it's easy to do.


whatever you do, don't let the interest build up month after month. that's a mistake i made way back when and i'm still paying for it.

Sep 5, 2012 4:32PM
last time i looked into it, only a few dozen or so federal student loan debts have ever been discharged in bankruptcy court, so don't bank on it.
Sep 5, 2012 4:29PM

Student loans should not be dischargeable. I borrowed money so I could go to college but I didn't go to the most expensive college I was accepted to. I went where I could  receive a suitable education and where I could afford.  I knew when I signed for the loans that I had to start paying them back 6 months after I graduated or left school for any reason. When I graduated,  the monthly payment was higher than I could afford at the time so I extended the life of the loan by 5 years. Does it suck? Absolutely!! But guess what? I agreed to the terms when I signed the loan documents.

I'm so tired of reading about folks who borrow money and then moan and groan when they have to start paying it back. Deal with it!

Sep 5, 2012 4:22PM
Sep 5, 2012 4:16PM
Sep 5, 2012 4:16PM
Wow, the "entitled" class speaks again.  I am shocked at how many what appears to be young people feel they need not pay their debts.  Times were tough when I graduated college, but I managed to pay until I was well over age 45, and until the various student loans were paid in full.  Figure it out, if you don't pay your student loans off, which is probably the single largest receivable this government has, or you taxes or whatever, there will be no money for these entitlements.  With this attitude it is no wonder the U.S. is $16 trillion in debt.
Sep 5, 2012 4:16PM

"Repay" not "replay"


Also, I am hearing many new graduates are essentially banking on the government setting up a program to forgive student debt without adverse consequences for the borrower student so that in the meantime, they make minimal payments and hope the rest of the balance will be forgiven in a few years.  Any new legislation passed must take into account that at least some people may be planning to have their loans forgiven (even if their circumstances are not "hopeless") and the impact it would have on the rest of the economy.

Sep 5, 2012 4:13PM

They should allow the discharge of student debt, but.......
If you don't pay your car or home loan the lender takes it back.
They should apply the same rules to student debt.
If someone can't repay the loan, or wants the debt discharged in bankrupty, the lender should reposses the degree from that person, and make it a criminal offense to even put that degree on their resume.
A teacher can't teach without that degree, a doctor or nurse can't practice medicine without that degree, etc...
Don't want to pay the loan?, don't worry.... the world needs ditch diggers too.


Sep 5, 2012 4:10PM
Let's get real here.  Why don't we attack the real problem of the outrageous cost of a higher education and the scam of trying to get kids who are not prepared for college to to pay into the system and wash out in the first couple of semesters.  Lizzy Warren wants debt relief for college students but how about not paying her a six figure salary for teaching one class.  I think these colleges and universities are as bad as the banks.  I agree that these kids need help with this debt but  where is the sanity in paying more than the cost of a house for a college education.  It's about time that we analyze all the costs (and scams) in higher education and begin to police that rather than guarantee student loans or force kids into bankruptcy!
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