The integration of the undue hardship clause and later law amendments have significantly shaped the bankruptcy terrain for student loans, creating a formidable burden of proof for borrowers wishing to establish undue hardship.
The ‘Undue Hardship’ Test
Most courts now require debtors to satisfy three conditions:
The debtor cannot maintain a minimal standard of living for herself and her dependents if forced to repay the loans.
Additional circumstances exist indicating that the debtor’s financial situation is likely to persist for much of the student loan repayment period.
The debtor has made a good-faith effort to repay the loans.
Over time, two primary tests, the Brunner Test and the Totality of Circumstances Test, have emerged to assess whether a debtor fulfills this undue hardship standard.”
Current Student Loan Bankruptcy Law
In the current state of student loan bankruptcy law, according to Section 523(a)(8) of the U.S. Bankruptcy Code, student loans are exempt from discharge, barring instances of undue hardship.
Specifically, 11 USC § 523(a)(8) states that education debt, including federal loans and private loans, cannot be discharged in both Chapter 7 bankruptcy and Chapter 13 bankruptcy (type of bankruptcy) in some cases.
Related: What Happens to Student Loans in Chapter 13?
These conditions cover various scenarios, such as the loan being made, guaranteed, or insured by the government, made under a government-funded loan program, or meeting the IRS’s criteria to be a qualified education loan.
But discharging student loans in bankruptcy is highly restricted and tougher than most other types of unsecured debt, like medical bills, credit card debts, or personal loans.
You must not only file a Chapter 7 or Chapter 13 bankruptcy, but you also must file a separate lawsuit known as an adversary proceeding. That’s where you use the Education Department or private lender and ask the bankruptcy judge to discharge or forgive the remaining loan balance.
Related: How to File an Adversary Proceeding to Discharge Student Loans