In re Rice: Why HEAL Loans Are Almost Impossible to Discharge in Bankruptcy

If you have a Health Education Assistance Loan (HEAL loan), bankruptcy is almost never a way out. A 1996 case, In re Rice, made that clear: unless repaying would be “unconscionable” — not just difficult, but shockingly unfair — the debt survives.

That decision still governs HEAL loans today.

While most student loans require showing “undue hardship” to qualify for discharge, HEAL loans face the much stricter “unconscionable” standard. In practice, that means bankruptcy isn’t a realistic option for most borrowers.

Most student loans require you to prove “undue hardship” to qualify for discharge in bankruptcy. That’s already a difficult standard, but some borrowers do succeed.

HEAL loans fall under a different law — the Public Health Service Act — and use a stricter test: “unconscionability.” Courts have defined that to mean repayment must be shockingly unfair, harsh, or outrageous.

If you have a HEAL loan, that bar is so high that bankruptcy almost never works. Congress wrote the rule this way to protect taxpayer dollars used to fund medical and dental education, assuming graduates would earn high incomes.

Related: Can You File Bankruptcy on HEAL Loans?

Ronald Rice borrowed about $20,000 in HEAL loans in the late 1970s to attend medical school but never finished his degree. By the mid-1980s, he had defaulted. Once the government stepped in as guarantor, the balance grew quickly with interest and penalties.

By 1989, the government had a judgment against him for more than $60,000. When he filed for bankruptcy in 1992, the total was over $77,000 — nearly four times what he borrowed. In all that time, Rice had voluntarily paid only $55.

At first, the bankruptcy court reduced his debt to about $27,500 using its equitable powers. On appeal, the higher courts reversed that decision. They ruled that fairness alone wasn’t enough; the law required proof that repayment would be unconscionable, and Rice didn’t meet that standard.

HEAL loans use the legal standard of “unconscionability” instead of “undue hardship.” Courts define that to mean repayment must be shockingly unfair, harsh, or outrageous — a far tougher bar than undue hardship.

Here’s the practical difference:

• Undue hardship: repaying would leave you unable to maintain a minimal standard of living, with no realistic chance of improvement.

• Unconscionability: repayment would be so extreme that it shocks the conscience — far beyond ordinary financial struggle.

In In re Rice, the court said it considers several factors when deciding if repayment is unconscionable:

• Income and earning potential

• Health of the borrower or dependents

• Education and assets

• Necessary living expenses

• Good faith efforts to repay

For borrowers, this means courts don’t just look at your current hardship — they also weigh your future earning potential, your lifestyle choices, and whether you’ve made genuine efforts to repay.

In Rice’s case, the court ruled that while repayment might be difficult, it wasn’t unconscionable.

The Rice decision set the standard courts still follow in HEAL loan cases. The appeals court made two points that remain central today:

• Fairness is not enough. The bankruptcy court had reduced Rice’s debt using its equitable powers. On appeal, that ruling was reversed. The court held that judges cannot discharge HEAL loans unless repayment would be unconscionable.

• A very high bar. By defining “unconscionable” as shockingly unfair, harsh, or outrageous, the decision confirmed that very few borrowers would ever qualify. Later cases, including the Fourth Circuit’s Smitley decision, reinforced this strict approach.

If you still have a HEAL loan, bankruptcy is almost never the way out. Unless repayment would be unconscionable, the debt will survive.

Your best options are outside the bankruptcy system:

• Direct Loan Consolidation: Combine your HEAL loan into a federal Direct Consolidation Loan. This gives you access to income-driven repayment (IDR) plans and forgiveness programs such as Public Service Loan Forgiveness (PSLF).

• Repayment agreements: The Department of Education can set up a voluntary repayment plan to stop collections like wage garnishment or tax refund offsets.

• Settlements: In limited cases, the Department of Education or Department of Justice may agree to settle HEAL debt, though steep discounts are rare.

• Disability or death discharge: HEAL loans can be discharged if you die or are declared totally and permanently disabled.