Can Bankruptcy Help Solve Your Student Loan Problem Even if Your Student Loan Debt Is Non-Dischargeable?

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A general rule, student loan debt is non-dischargeable. Bankruptcy Code Section 523(a)(8) provides that unless you can show “undue hardship” your student loans will survive your discharge. As my colleague Craig Andresen recently wrote on this blog, the Brunner case, which is the authoritative case defining undue hardship makes it almost impossible to meet this standard. Craig points out, correctly, that Brunner was decided at a time when the Bankruptcy Code did allow older (more than 7 years old) student loans to qualify for discharge based on their age and that the time has come to change this extremely difficult to meet standard.

In any case, the harsh Brunner standard remains the law of the land and unless and until Congress or the Supreme Court changes it, student loan borrowers who are not on their deathbeds are going to have to find other ways to deal with crushing student loan debt.

Fortunately there are some options. If your student loans are issued or guaranteed by the federal government, there are a number of income based payment plans that can both reduce your monthly payments and reduce the total balance due.

If your student loans are issued by private banks, you have fewer options because federal law does not mandate that private lenders agree to income based loan restructure. However, private student loans can become uncollectible based on statutes of limitation, and private student loan debt collectors often violate the FDCPA which can give rise to damages.

Bankruptcy can also be part of your strategy, even if you cannot discharge your student loan debts.

First, you can use Chapter 13 to delay wage garnishment and collection actions. This does not really solve the problem but it does buy time. There has been some talk in Congress about adding some consumer protection laws to the private student loan industry – should this happen while you are in a Chapter 13, you may have better options in 5 years than you do today.

Further, in some jurisdictions, the time you are protected from collection while you are in Chapter 13 counts towards the statute of limitations for collections. If this is the case where you live, you may be able to avoid collection actions during the 5 years of your Chapter 13, and then avoid post-discharge collection because creditor is time barred from pursuing you.

Bankruptcy – both Chapter 7 and Chapter 13 – can be used to discharge other debts and/or surrender secured property to decrease your monthly expenses and thereby free up funds to be used to pay off student loans.

There is a general consensus among both liberals and conservatives that something needs to be done about student loan debt. Everyone seems to agree that the cost of a college education has outstripped the likely earning power of graduates and that our economy will not grow if young adults remain financially strapped for years trying to pay student loans.

At this point, there is not much consensus about what to do about this problem but hopefully our elected leaders will see fit to address this problem. Until that happens, however, you should be willing to explore fully all of the current options available to you.

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