Discharging Students' Debts Through Bankrupcy

It is common knowledge that students who have amassed large college debt burdens cannot discharge those debts through bankruptcy. That “knowledge,” however, is not really the case — the laws are written to permit discharge of student loan debts in some cases. And, with the federal government pushing for broader interpretations of those laws, they are now an incentive for students to amass debt and then dump it on the taxpayers. The “undue hardship” provision in the U.S. Bankruptcy Code says that student loans cannot be discharged unless“excepting such debt...would impose an undue hardship on the debtor and the debtor’s dependents.” Just how difficult is it for a student debtor to get a court to rule that having to pay off student loans would be an “undue hardship”? Evidently, it’s not as difficult as most people think. The general perception is that federal student loans are not dischargeable in bankruptcy.

Obviously that assumption is not true because an allowance exists for discharge in the case of undue hardship. But many incorrectly assume that threshold is impossible or nearly impossible to accomplish. Rhode finds the support for his conclusion in his analysis of 35 adversary proceedings in 2012 where the debtor sought discharge of student loans through bankruptcy. In those cases, the debtor won full discharge in 47 percent and received some reduction or more favorably repayment terms in another 33 percent. Those 2012 numbers are in the same vicinity as the numbers calculated by Professor Jason Iuliano from cases filed in 2007, which formed the basis for his 2011 paper published in American Bankruptcy Journal.

An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard. Iuliano found that 25 percent of the cases resulted in full discharge and 26 percent resulted in partial reduction or easier payments. Having seen that the undue hardship standard isn’t as formidable as it’s cracked up to be, Iuliano wondered why relatively few people who have large student debts try using bankruptcy. One answer he advanced was that individuals probably think that they have little chance of winning unless they hire an experienced (and, naturally, expensive) lawyer. Unexpectedly, however, Iuliano found that many of the successful debtors did not have legal counsel. They represented themselves.