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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 4:06PM

We do remember that if mom and dad co-signed the loan, they will have to pay it back regardless of junior's bankruptcy?

And if M & D don't cosign, and junior can just take a bath in bankruptcy,why would a bank lend anything to someone who has no known source of repayment except that job Obama is holding for him? I can't think of a faster way to dry up sources for student loans than to make them dischargable in bankruptcy.

Sep 5, 2012 4:04PM
Back in the 70's I knew guys who went to dental and medical schools all paid for with loans and immediately declared bankruptcy upon graduation.   People should not, like those guys, be able pay for degrees with large income potential and then walk away.  That is what led to the laws we have today.  The problem is now banks can and do loan far more money to people then the earning power of the degrees they are studying for justify with the knowledge those people with be stuck paying the money back even if it takes decades.  Banks no longer have to worry about these loans because the law practically turns the borrowers into slaves and no one honestly advises naive young people what they are getting into.  The laws should be rewritten to reintroduce risk for the banks who make these loans.  Not to go back to the 70's but so at least they wouldn't loan hundreds of thousands of dollars to people with no real employment prospects to pay that kind of money back. 
Sep 5, 2012 4:03PM
1. Moan about not being able to afford college
2. Pass irresponsible student loan legislation 
3. Use student loans to go to any freaking college you want
4. Graduate, or don't graduate.. whatever
5. Try to get a job in a saturated/weak/non-existent job market
6. Moan about not being able to file for bankruptcy 
7. Pass irresponsible bankruptcy bailout legislation
8. Rinse and repeat
Sep 5, 2012 3:52PM
Basic republican policy has ruined the middle class.  Bankruptcy is not a good option in any event, however that being said, college should have to eat their tuitions if they cannot place the student in a job in the field.  Private loans, yes they should be able to be bankrupt as any other debt.  College caused a whole lot of this by increasing tuition to the point where the only way you can go to school is by a loan.
Sep 5, 2012 3:40PM
Private student loans should be able to be discharged under bankruptcy. They have higher interest rates and they don't have the same repayment options as federal loans. It's not fair for people to be forced to pay student loans for the rest of their lives when big corporations and mortage holders are given help from the government.  The big corps are sending jobs overseas and hoarding cash thats should be helping to create GOOD paying jobs. It didn't work with Bush and it's not going to work now.  I wouldn't vote for Romney if my life depended on it. He'll just push the same destructive policies that BUSH enacted (2005-non dischargable private student loans) 
Sep 5, 2012 3:37PM
Mitt Rob-me is patriotic to CHINA.

By helping send American manufacturing and factories to China, Romney helped to China's economy soar while America wilted into INSIGNIFICANCE.

Romney helped destroy America without even being president, so imagine the destruction to our economy if he is elected.

Romney will send more jobs to China to kill off the last remnants of the American middle class that Republicans have long declared war on.

The jobs that our young adults are supposed to be filling when they graduate are over in China, perhaps forever unless we write laws that bring those jobs home.


Not  every ones student loans are that black and white. I believed I was scammed by DeVry meaning they wanted me to stay longer in school then I wanted to or even thought I needed too. My talent was lost when Devry asked me to take courses I still to this day don't believe I need to take a High school math? Really?  So I walked.

Devry should fit the bill because not only did they not help me reach my goal but should of never allowed me to attend in the first place because I never passed the admittance test.  So at what point do schools have to fit the bill for them just wanting to be greedy? They saw me as just a meal ticket and nothing more.

For that I don't feel I should have to pay the loan back Devry should for not coming thur for me when I needed them too. Deduction of my pay and not allowed to get my tax refund check should be criminal because I have become unable to provide for me and my family I count on my pay check to pay check, and my tax refund check I have a minor to care for and when they dip in my money that leads me more into financial hardship I have to live too I have a minor to raise on my own.

So for these reasons my loan should be forgiving and the school in my case should fit the bill and pay the student loan back that they took with no intension of ever helping me get my associates degree. Also Devry won't even allow me to go to another community college in my area because they refuse to fax all my transfer test scores to another school I wish so much to go to.

So I got screwed and Devry did not let me go to their school or anywhere else I wanted to attend a college. So I'm damned if I do and damned if I don't. I could not win for losing. The interest alone are killing me I can die today or ten years from now and never pay off my student loan so for me I truly believe my loans should be forgotten. The sooner the better so I can provide for myself and my family and start to live again. I can't live on what they leave for me to live on it is not human. I have bills to pay I have to live too! Stop this madness Obama can you? I want to live and I want my student loans dropped. I will never make more then I do this economy will be the same for the amount of time it will take me to repay so it needs to be dropped forgiven what ever you wish to call it asap.

Sep 5, 2012 3:29PM
I know people will say I should get over it and find some way to make ends meet, but be that as it may, I am one of those people this article is talking about.  I went to school, became an RN and went to work.  Then I accidently  got pregnant.  Near the end of the pregnancy something was wrong.  A year later I was on oxygen fighting for my life.  I was diagnosed with Peripartum Cardiomyopathy, Congestive Heart Failure, Restrictive Lung Disease, and Severe Depression.  I couldn't take care of myself, let alone my child or patients.  I had to get up an extra hour earlier because I had to take a nap after taking a shower and getting dressed.  I went to sleep as soon as I got home from work.  Later I was fired from my job (they got around the disability act because they said it was dangerous for me to be taking care of patients).    I am now on disability with a 2 year old toddler with a mortgage, utilities, grocery bill, car payment for an older model car (nothing special), and student loan debt of 100k.  I can pay my mortgage (which is cheaper than renting around here...I bought the house when it was foreclosed), utilities, grocery bill, and car payment with enough to spare for gas in the car...if I don't pay any of my student loan debt.  If I pay even part of my student loan bill I won't be pay to pay one of the other bills.  I never planned on needing a way out of student loan debt, I never anticipated it, or even feel happy that I could get it removed.  However, I'm to a point that I don't really have an option.  My husband and I make just over the mark to qualify for much of anything.  All we qualify for is for the monthly payment to be reduced for x amount of time, but in turn they extend the loan by x amount of years.
Sep 5, 2012 3:27PM
How could a woman with Asberger's rack up that much in debt if she could not reasonably expect to work when finished with school?  If you can't pay, don't play.
Sep 5, 2012 3:26PM
no it was bush's "no child left behind act" that made them believe that they could actually go to a university and gave them false hopes because they couldn't afford with it pay back ur loan and quit looking for the easy way out!
Sep 5, 2012 3:17PM
Yea these selfish overindulgent little brats that voted for barry and his bs, now can't find a job. So what to do, well looks like the tax payer has to bail them out also. Should make the parents and their corrupt teachers pay for this, they were the ones that lied and created these vile little creatures!
Sep 5, 2012 3:07PM

YES!  Now that would throw "the man" for a loop....and probably speed up the bankrupting of this close to ruined nation.  Vote  "against obama".  Anyone but Obama!  Seriously, how can it be that he is even considered an option at this point.  Sorry MSN, but it's true.


Even on MSN sites when they post a poll the results go against Obama. 

Sep 5, 2012 2:49PM
Agree with the article.  But the feds are not applying the same standard to this as they are foks who cant pay there mortgage.  Seems to me that once again big government (big brother) has 2 sets of standards.  No one made folks take out loans that they knew they could never pay back when they bought houses they could not afford. The feds guaranteed the loan and the Government made good on  them.  Folks could go under and that was the end of it.  Is there something wrong with a system that allows folks who owe hundred of thousands on a home can walk away but a kid who owes less then 50 thousand cant?
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