Discharging Student Loans in Bankruptcy is Possible, Sometimes

For many people, their student loans are the heaviest part of their debt obligations. Educational loans may also seem like the hardest debts to resolve, even in bankruptcy. It isn’t as simple as whether student loans can be discharged or not in bankruptcy. Instead, it will depend on the type of bankruptcy, the lender, and even what the loan was issued for.

Can Student Loans be Discharged in Bankruptcy?

When a person files for bankruptcy, student loans aren’t treated the same as other unsecured debts. When a Chapter 7 or Chapter 13 bankruptcy is over, most or all debts are usually discharged, and creditors must be satisfied with the portion of their debt, if any, that is repaid through the process. However, as a general rule, qualified education loans are non-dischargeable and will survive the bankruptcy process.

Student Loans in a Chapter 7 Bankruptcy

A Chapter 7 liquidation bankruptcy can be extremely helpful to debtors who find themselves unable to afford their monthly payments. In a technical sense, chapter 7 requires the sale and distribution of the debtor’s non-exempt assets, but for the vast majority of our clients exemptions for a person’s home, vehicle, furniture, and other property result in them retaining all of all their assets. Any dischargeable debts that cannot be satisfied are discharged, allowing the debtor a “fresh start,” free from collections lawsuits and creditor calls.

Student loans are considered “non-dischargeable” debts, which means you will continue to owe the balance after the bankruptcy is over. Connecticut residents do not need to reaffirm the debt, simply continue to make payments. However, because so many other debts are forgiven in bankruptcy, you may find it far easier to pay off your student loans after the bankruptcy than you ever imagined before.

Student Loans in a Chapter 13 Bankruptcy

If you earn too much income, or own significant non-exempt property that may be lost in a Chapter 7 bankruptcy, you may choose to file a Chapter 13 Wage Earner Reorganization instead. Over 3 to 5 years, you can use a repayment plan to pay down your debts, discharging any eligible debts that haven’t been paid off at the end of that period. Once again, qualified education loans are non-dischargeable, and will survive the repayment plan. In Connecticut, you have the option of paying such student loan debt through the plan, or you can elect to continue to pay directly, whichever is more helpful. However, by prioritizing the payments on those student loans, you can reduce the amount paid on other, dischargeable debts, and gain greater relief from your overall obligations.

Discharging Government vs Private Student Loans in Bankruptcy

What many people don’t realize is that not all student loans are treated equally in bankruptcy. Many college students obtain loans to cover tuition, room and board, books, living expenses, and other costs from two separate sources:

1. The United States Department of Education (referred to here as government loans)
2. Banks and financial lenders (referred to here as private loans)

The law exempting student loans from bankruptcy debt forgiveness applies to “qualified education loans.” Federal law defines that term as any debt incurred “solely to pay qualified higher education expenses” for the borrower, their spouse, or any dependent. It also applies to debt incurred to refinance qualified education loans. That includes all government loans, but not all private loans.

For example, educational expenses paid by borrowing money from a retirement account or credit card will not qualify. Loans taken to pay for non-qualified expenses, over and above the cost of attendance, may also not qualify as non-dischargeable debt. In addition, if you attended a school that is not eligible for Title IV federal student aid, then the loan to pay for the cost of that education is not a qualified education loan, and may be dischargeable even if it is labeled a “student loan.”

These exceptions to the rule are why you should carefully review your student loan documents with a bankruptcy attorney before deciding whether to file for bankruptcy. Depending on what proportion of your debt is dischargeable, it may be wiser to file a bankruptcy petition, or to apply for one of the many federal student loan repayment plans available.

“Undue Hardship” Can Discharge Qualified Education Loans

Even if most of the money you owe falls into the category of “qualified education loans,” in some cases you may still qualify for bankruptcy relief. This is done by filing an “undue hardship” petition in an adversarial bankruptcy proceeding. This is far more complicated than simply filing a bankruptcy petition, and it will not apply in most cases. However, when it does, it can lead to substantial and meaningful relief.

In late 2022, the United States Department of Justice streamlined the process for borrowers to show they will suffer an “undue hardship” unless their student loans are discharged. These standards provide borrowers with an attestation form that they can use to lay out their past, present, and future financial circumstances for the bankruptcy court and the government to consider. The Department of Justice and Department of Education will review the information and decide whether to recommend that the bankruptcy court discharge your student loan debts.

We utilize software which will predict the likelihood of your attestation application succeeding, prior to filing an adversary proceeding in your bankruptcy case, which is necessary to rebut the presumption of non-dischargeability which attaches to most student loans.

The Connecticut Bankruptcy Court will then consider the following factors to decide if discharge is appropriate:

• Whether the debtor can maintain a minimal standard of living if forced to repay the loans
• If the current state of affairs will likely exist over a significant portion of the repayment period
• Whether the debtor has made good faith efforts to repay the loans in the past

While this is a high barrier, and while many debtors will not qualify for undue hardship relief, the still somewhat new attestation procedure has provided relief in many cases.

Get Help Resolving Your Student Loan Debt

The bankruptcy lawyers at Lawrence & Jurkiewicz, LLC represents clients throughout the greater Hartford area and the Litchfield County area. We can help Connecticut borrowers consider their financial situation and identify options to reduce, refinance, or restructure student loan debt. For those who qualify, we can also assist in filing an “undue hardship” petition, to allow student loans to be discharged in bankruptcy. We know one size doesn’t fit all when it comes to bankruptcy. We will meet with you to review your financial circumstances and help you make the right decision for you and your family. Please call (860) 264-1551 or contact us for a free consultation.