Writing off a Student Loan
To legally write off —discharge—a student loan in bankruptcy takes an extra step: proving that it is causing you “undue hardship.”
Adversary Proceedings and the Discharge of Debts
Our last several blog posts have been about adversary proceedings—lawsuits in bankruptcy court. In rare circumstances you might be on the receiving end of an adversary proceeding. Or you may use the advantages of bankruptcy court to file your own adversary proceeding against a creditor.
Last Friday’s blog post was about some of the reasons you’d consider suing a creditor during your bankruptcy case. The first reason was to discharge—legally write off—a debt that would otherwise not be discharged. Student loans fall in this category.
Most debts are discharged in bankruptcy without you having to take any special action against them during your case. This includes virtually all medical debts, credit cards, and the vast majority of other personal and business debts. Some other debts are never discharged—child and spousal support and criminal fines, for example. And finally, other debts may be discharged but only under certain circumstances. These include income taxes and student loans.
But income taxes and student loans are very different in the types of conditions that determine dischargeability. Income taxes generally are or are not discharged based on a set of readily determined facts. The main facts are whether and how long ago the pertinent tax return was legally due to be submitted, and how long ago that return actually was submitted to the tax authority. Usually, if you file the tax return and wait long enough, the tax will be discharged in bankruptcy.
The Vague Condition of “Undue Hardship”
In contrast, to discharge a student loan the condition that you must meet is maddeningly vague. The Bankruptcy Code simply says that a student loan is not discharged unless requiring you to pay it “would impose an undue hardship on [you or your] dependents.” See Section 523(a)(8). So the burden is on you to show “undue hardship.” Otherwise you’d remain liable on the student loan. The court order that discharges your other debts would not apply to it.
That means that to discharge a student loan you and your bankruptcy lawyer must file an adversary proceeding against your student loan creditor(s) and convincingly demonstrate to the bankruptcy judge that paying the debt would cause you “undue hardship.”
What Does “Undue Hardship” Mean?
You may think that showing “undue hardship” should not be hard if you can’t afford to pay the student loan. But it’s harder to show undue hardship than you’d think. Likely much harder.
For many years bankruptcy judges and federal appeals courts have been trying to figure out what those two words mean.
First, what determines whether or not a student loan debt creates a hardship?
And second, what more beyond ordinary “hardship” is needed to create an “undue hardship”? Much has been made of the fact that Congress didn’t just say “hardship” but rather an “undue” level of hardship. That’s clearly a tougher condition to meet. But what does that odd word, “undue” mean? How can those two vague words be turned into a practical legal standard?
The Three Practical Requirements
Over time, judges have generally come to agree that to show “undue hardship” you have to meet three requirements.
- First, you must currently be unable to maintain even a minimal standard of living for yourself and any dependents if you had to make the required payments on the student loan.
- Second, this situation must be expected to continue over all or most of the student loan’s repayment period.
- Third, you must have earlier acted responsibly by making a real effort to pay on the student loan, and/or to try to qualify for any available forbearances, debt consolidations, and administrative payment-reduction programs.
To establish “undue hardship,” you have to meet all three of these conditions. Otherwise, making you keep paying the student loan(s) may be indeed cause you a hardship. But your hardship would not rise to the level of a legally established “undue hardship”!
As “undue hardship” has come to be legally defined, it can be a challenging condition to prove. As a result filing bankruptcy doesn’t necessarily give you an easy way to get out of student loans. However, people do qualify under the right circumstances. And it does seem like more and more people filing bankruptcy have student loans as a major part of their problem. Student loans have gotten larger and more burdensome. And frankly more student loan debtors are getting older, closer to disability, illness, and retirement. For a variety of reasons more people are qualifying for “undue hardship.”