Tuesday, October 1, 2013

Why can't you discharge student loans in bankruptcy?

You can!
Image courtesy Images_of_Money.

Sort of. Depends on your circumstances. It used to be easier, especially before 2005. Congress has slowly amended the Bankruptcy Code to make student loan discharge less and less possible.

This began in 1976. There were news stories about doctors and lawyers graduating from their respective professional schools, then discharging their loans in bankruptcy. This whipped up a legislative panic that has stuck with us ever since. In 1976, Congress passed a law preventing students from discharging loans made by the government or a non-profit college or university within the first five years of repayment. In 1984, Congress passed the Bankruptcy Amendments and Federal Judgeship Act, which exempted all private student loans from bankruptcy. And in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act prevented students from discharging any student loan unless the borrower can prove repaying the loan would cause “undue hardship.”

Nowadays, borrowers can follow a few courses of attack to try to get their student loans discharged in bankruptcy. These theories include:

1. Repayment would cause an undue hardship (often under the Brunner test), which studies show works approximately 39 - 57% of the time
2. Student loans were not used for qualified educational expenses (i.e. helicopter school)

Last week, Elizabeth Warren called for Congress to roll back this timeline of restrictions and make bankruptcy debts easier to discharge.

Until then, your odds are somewhere between 39-57%.

For more:
* Just a friendly reminder that this is information, not legal advice. Talk to your attorney!

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