Student loans are extremely difficult to discharge in bankruptcy. The bankruptcy code states that a debtor may obtain a discharge of a government-sponsored student loan only if repaying the debt would impose an “undue hardship” on the debtor and his dependents.
Proving undue hardship is more difficult than it sounds. The bankruptcy code requires the debtor to file an adversary action and have a hearing to determine whether repayment of the debt would constitute an undue hardship. At that hearing the bankruptcy court may require proof that: 1) the debtor cannot maintain a minimal standard of living and also repay the loan; 2) the debtor’s financial inability to repay the loan is likely to continue for a significant portion of the loan’s repayment period; and 3) the debtor has made a good faith effort to repay the loan. If the debtor is successful in proving undue hardship, the student loan debt will be discharged by the bankruptcy court.
Even though the bar for discharging student loans is set extremely high, it is often equally challenging for a creditor to “prove” its debt during a Chapter 13 bankruptcy case. The Chapter 13 claims process may be used by the debtor to obtain a judicial determination of what is owed. A student loan is a contract and the debtor may ask the creditor to produce the contract, to prove that the current creditor has standing to collect on the loan, and prove the current amount owed. During the claims process the burden is on the creditor to prove both that you owe the debt as well as the amount. This may be difficult for a creditor if the loan has changed hands multiple times.
While discharging your student loans may be difficult, the bankruptcy laws offer several benefits including temporary relief from the bankruptcy automatic stay and a chance to make payments through a court supervised Chapter 13 plan. Additionally, non-bankruptcy options are available including deferment, forbearance, loan forgiveness, and income contingent repayment plans. If you are experiencing financial difficulty and have student loans, consult with an experienced bankruptcy attorney and discover your options.