Why Are Student Loans Non-Bankruptable? The Truth About Education Debt

Why are student loans non-bankruptable? It seems unfair, right? You might be drowning in student loan debt, and the thought of filing for bankruptcy probably crossed your mind. It seems like other people can walk away from car loans and credit card debt. But there’s a lot more to student loan debt. You’ll learn about the unique aspects of bankruptcy law when it comes to these educational loans, how the current student loan bankruptcy laws came to be, and if there might be ways around it. This all begs the question; why are student loans non-bankruptable?

There’s a misconception out there that you can never get rid of student loans, no matter what. But the truth is that you actually can. It’s just ridiculously hard, and that’s largely due to specific provisions in U.S. bankruptcy law.

The “Undue Hardship” Standard for Student Loan Bankruptcy

This term “undue hardship” plays a huge role in trying to get your student loans discharged in bankruptcy court. It means you have to prove that your financial situation is beyond rough and that your student loans make it nearly impossible to maintain even a basic standard of living. Bankruptcy laws view these as debts tied to a future ability to earn money, unlike something like a credit card that reflects more on past spending.

Proving Undue Hardship for Student Loans: What You’re Up Against

Before 1976, students could file for bankruptcy and clear their student loan debts just like other unsecured debts. However, due to the passing of Section 439A of the Higher Education Act, an “undue hardship” standard was enacted, requiring borrowers to prove extreme hardship caused by these debts.

Think of it this way: you have to convince a judge that repaying your student loans would be so detrimental that it would push you into poverty and prevent you from affording basic needs. Most courts lean towards something called the Brunner Test when evaluating an “undue hardship” claim. This comes from a 1987 case of Marie Brunner, a recent graduate facing a daunting student loan balance.

To meet the Brunner Test you need to jump through these hoops:

1. Minimal Standard of Living: You must show that repaying your student loan debt makes it impossible to maintain a basic standard of living. This includes being able to afford necessities like food, shelter, and clothing for yourself and your dependents.
2. Continued Hardship: Your circumstances can’t be temporary; you need to prove that your financial woes will likely persist for a significant portion of the loan repayment term. Think long-term struggle.
3. Good-Faith Effort: This is a biggie. You must prove you genuinely tried to repay your loans before seeking a discharge in bankruptcy. Did you attempt other options like income-driven repayment plans?

The burden of proof is firmly placed on your shoulders. That’s why seeking legal advice from an attorney specializing in student loans is critical if you’re in this position.

Why Are Student Loans Difficult to Discharge in Bankruptcy?

The non-dischargeable nature of student loans can be traced back to a long-standing fear of what is referred to as “moral hazard.” Lawmakers back in the 1970’s feared that borrowers might try to take out hefty student loans only to discharge those loans immediately upon graduation, before beginning high paying careers. It’s basically a suspicion of bankruptcy abuse, assuming people will dodge repayment.

To demonstrate their concerns, some in the 1970s referenced a study. A 1977 study led by the General Accounting Office looked into government investment loss due to bankruptcy. The results were interesting. Data from the study indicated that less than 1% of federal student loans ever were fully forgiven in bankruptcy. That suggests that concerns might have been overblown. People don’t go for bankruptcy as the go-to; they often prefer repayment even when facing financial challenges.

Even so, this concern over moral hazard was compelling enough to spark legislative reforms that persist to this day. They really ramped things up in the following years. This all contributed to making it notably more challenging to eliminate your student loan debt through bankruptcy.

Student Loans and The U.S. Bankruptcy Code: The Road to Non-Dischargeability

There’s been a back-and-forth on this issue in Congress. Changes have shifted student loans further from other unsecured debts in terms of bankruptcy rules. These provisions haven’t stayed static – they have undergone amendments to toughen them further over the years, particularly in 1990 and again in 2005 with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act.

This tightening has left a whole generation of student loan borrowers burdened with repaying their educational debts, sometimes exceeding $100,000, even while navigating difficult financial circumstances.

Navigating Bankruptcy With Student Loan Debt

When we’re talking about student loans in bankruptcy court, they typically land under Section 523(a)(8) of the U.S. Bankruptcy Code. Basically, this spells out scenarios where these debts don’t just vanish after you file. They could involve loans insured or backed by the government or loans fitting the Internal Revenue Service’s requirements for a qualified educational loan.

What’s a qualified education loan according to the IRS? It refers to funds you borrowed and solely used to cover the cost of attendance during your academic years at an eligible educational institution.

So what’s considered “cost of attendance” you might ask? Here’s what counts:

Here’s where it gets complex: you must go a step beyond filing a standard bankruptcy case. You also have to launch a lawsuit called an adversary proceeding in that same court. This adversary proceeding means suing either the U.S. Department of Education or your private lender and having them agree to discharge what’s left of your loan.

Seeking Legal Advice is a Must

Navigating the muddy waters of student loan bankruptcy laws, and meeting that sky-high undue hardship threshold, demands skilled legal assistance from a specialized student loan attorney. I get how hopeless you can feel right now. It’s critical to understand all the nuances, challenges, and potential solutions within the existing legal framework. This allows you to move forward equipped with the correct strategy for your unique situation.

Why Are Private Student Loans More Open to Bankruptcy Discharge?

So here is the kicker; private student loans, though often grouped under the broad banner of “student loan debt”, can often face less stringent regulations when it comes to bankruptcy discharge. What sets private loans apart? They are more aligned with unsecured debts like credit card balances.

However, even private student loans, under certain conditions, get pulled under that same “undue hardship” provision as the federal ones. These conditions are spelled out clearly in Section 523(a)(8) of the U.S. Bankruptcy Code, covering things like borrowing amounts that exceed education expenses or the loan’s intended use being misaligned with allowed costs. They even define exactly what’s an acceptable “qualified educational institution,” going so far as providing the DOE’s Federal School Code List. You can’t be making any of that up – they get granular.

If your private loans slip into those qualified loan buckets, then, yes, they face the same uphill battle for a discharge. It boils down to: was the loan’s intended use and approval consistent with the allowed uses under the law? If it wasn’t, then it becomes subject to that more stringent process of an “adversary proceeding.”

A Ray of Hope for Struggling Borrowers: Justice Department’s New Guidance

As someone dealing with overwhelming student debt you might feel lost and desperate. That’s why, on Nov. 17, 2022, the Departments of Justice and Education introduced changes for handling future student loan bankruptcy cases. You have to remember, there is a ton of money at stake, especially as those holding student loans are struggling more now. Their solution? Have those requesting forgiveness for student loans during bankruptcy go through a more standardized evaluation.

The Justice Department is trying to ensure consistency and fairness. You can no longer play guessing games. How does this process play out?

Here are the general steps borrowers should expect to go through under the updated bankruptcy guidelines when seeking a bankruptcy discharge:

1. Documentation Submission: The process starts with you providing specific documents showing income, home situation, and hardships. This includes information about earnings, dependents, living expenses, assets, and prior efforts to manage and pay back student loans.
2. Justice Department Review: Once your forms and proof are in, a team at the DOJ reviews them all to see if they line up with their guidelines.
3. Recommendation Formulation: This team decides if your request for debt relief matches their benchmarks for hardship.
4. Recommendation Submission to the Court: They share their advice on whether or not to give a full or partial discharge of your debt, which is critical in making their case to the Judge. However, keep this in mind: the actual ruling is left to a bankruptcy judge’s discretion – so the recommendation isn’t final.

What’s driving these changes? It seems the DOJ is trying to help those really in a tough spot get debt relief, using a common process to give every borrower a fair chance. I believe this might be their way of trying to prevent confusion.

The Fight Over Student Loan Debt: Lawyers Speak Out

Bankruptcy law specialists in recent years have been pushing to revise laws on student loan discharges, believing too many graduates are getting squeezed with no help. It all came to a head with a 2012 study released by the National Association of Consumer Bankruptcy Attorneys revealing just how badly things are.

Nearly 80% of bankruptcy lawyers in this study claimed the amount of potential clients in dire need of assistance had skyrocketed in just a 3 to 4-year period. Think about how huge a leap that is. It shows something isn’t working with existing policies. You are definitely not alone if you’re facing a mountain of debt, with more of us going down this road recently.

In the same study an attorney named Mark Kantrowitz spoke up. He specializes in educational loans and has two really big finance sites, Fastweb.com and FinAid.org. According to Kantrowitz, private loans and credit cards share a key similarity in how we treat them. However, while credit card debt can easily vanish through bankruptcy proceedings, student loans often can’t. It all makes you question the thinking.

He thinks making student loan discharge more akin to the process of eliminating credit card debt might make lenders reconsider how they deal with education borrowers. In Kantrowitz’s perspective this policy change might lead to more flexibility and collaboration, which borrowers might welcome.

Alternatives to Student Loan Bankruptcy

While you’re wondering “Why are student loans non-bankruptable?”, there might be another way to fix things. You have other solutions besides going to court, solutions that could work way better in the long run. Bankruptcy leaves a mark for years to come, affecting your ability to buy a house or car and making credit cards much harder to get. That’s because it usually stays on your credit report for up to a decade, casting a long shadow. It’s tough to shake that impact.

Income-Driven Repayment Plans

If you are juggling federal student loans, income-driven repayment (IDR) plans could be an option. These let you lower your monthly payment to a percentage of your income for a set duration. It’s good for borrowers on a tight budget.

But there’s a catch; you still pay these back for years, ranging from two decades to a full 25 years. The silver lining though? Any money still hanging over your head gets erased, making these appealing for longer-term strategies. However, those with private student loans might be out of luck as IDR plans are for those dealing with federal debts.

Deferment and Forbearance

Life sometimes throws us curveballs; things like a surprise job loss or an unexpected medical expense. Those unexpected circumstances could push you to consider deferment or forbearance options for your student loan debt. Basically, they let you put your payments on hold for a limited period, giving you breathing room to catch up. Both federal and private loans have provisions for deferment or forbearance that allow this flexibility.

But you still need to get caught up, making these good for short-term problems, but not fixing the root problem of crushing debt.

Refinancing Your Student Loans: Lowering Your Debt Burden

Refinancing student loans can be a good tactic. With a solid credit score you can apply with lenders that specialize in student loan refinancing. These may offer more favorable terms that reduce what you owe, possibly lowering interest rates. Even those who filed for bankruptcy may have a chance – it could depend on the details of the filing and any efforts made to pay. Refinancing can make your student loan burden way more manageable.

Reaching Out to Consumer Advocacy Organizations

It might be scary trying to fix your student debt alone. Many borrowers facing possible loan default, turn to consumer advocacy organizations. They have experience working through payment challenges and navigating complex loan systems. Some help by negotiating repayment, figuring out payoff plans, or getting defaulted loans reinstated.

Conclusion

Why are student loans non-bankruptable? The simple reason boils down to how bankruptcy laws view these. Policymakers made it really difficult to get your educational debt wiped clean because they worry people will game the system and walk away. That’s why there’s a higher standard in place compared to credit cards or medical debt. But this “undue hardship” criterion, though meant to protect programs, places an immense burden of proof on you.

If you find yourself buried under education debt and wondering “Why are student loans non-bankruptable?”, you know now why it’s this way and why those holding these types of loans find themselves facing such a long, complex road ahead. You must fully understand those strict limitations on student loan discharges, so you can figure out the best solution for your specific financial needs. Whether exploring options, negotiating with lenders, or turning to those focused on debt relief and protection, making those tough choices demands a clear view.

If you’re struggling to keep up with your student loans and other debt, contact The Law Office of William Waldner. We will look at your situation and determine the best course of action, including whether bankruptcy is an option.