Is It Easier to Get Rid of Student Loan Debt in Bankruptcy Than We Thought?

By Andrew Leonatti on February 12, 2020

For years, economists, politicians, and others have been warning about the dangers of the student loan debt bubble. With current students and graduates collectively more than $1 trillion in debt, experts warn of the damage to the economy if all those debtors started defaulting.

Partly driving this looming debt crisis is the belief that it's way too hard to discharge financially ruinous student loan debt in bankruptcy proceedings.

New research, however, shows that it might not be as hard as we've all thought. Does that mean that thousands of debtors can find the relief they need?

Chaining Students to their Loan Debt

Until 2005, holders of private student loans (loans not backed by the government) could discharge their bad debts through the bankruptcy process, much like people drowning in medical or credit card debt.

From 1976 to 2005, public student loan debts issued by the government or non-profit universities could be discharged in bankruptcy if the borrower had made payments for five years and could prove "undue hardship."

But in 2005, Congress passed a law making it impossible to discharge any student loan debts without proving "undue hardship."

Re-Defining 'Undue Hardship'

It has been nearly impossible to define the term that lawmakers left intentionally vague in the 2005 law. Does it mean having a physical disability that prevents you from working? Do your loan payments have to make it impossible to pay any other bills? Or could it simply mean that your student debt load makes it tough to live the life you want?

For the most part, it's always been up to bankruptcy judges to decide what "undue hardship" means, which can be tough for lawyers to predict.

That lack of knowledge, according to Villanova University law professor Jason Iuliano, led many people to give up on trying to discharge their student loan debt. It's also meant that the few lawyers willing to take on the cases have to charge fees that are frequently too high for debtors.

According to research from Iuliano, about 250,000 student loan debtors file for bankruptcy every year, but more than 99% give up on trying to get their student loan debt discharged.

Of those who stick with it, however, more than 50% have gotten at least some student loan debt relief.

Iuliano said that it's "really important for bankruptcy attorneys to see that there are judges out there who are willing to grant undue-hardship discharges and that people are much more likely to obtain relief in bankruptcy for their student loan debt."

Should You File for Bankruptcy for Student Loan Debt?

Iuliano cautions, however, that despite what his research shows, your chances of success and the amount of debt discharged still depend on the judge who hears your case.

Not every filer will be lucky enough to appear before Chief Bankruptcy Judge Cecelia Morris of New York. In January, Morris discharged $220,000 for a borrower and said that her court "will not participate in perpetuating these myths" that student loan bankruptcies are impossible.

In the end, the outcome will likely depend on the quality of the attorney you work with and the judge who hears your case.

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