Student Loan Debt: Are Student Loans and Student Debt Dischargeable in Bankruptcy?

As an attorney, I work with a lot of people with student loan debt. Who doesn't have some student loan debt, right? I find there are a lot of misconceptions about what bankruptcy can do for your student loan debt. 

The general rule in bankruptcy is that a debtor cannot discharge student loans. Discharge is basically wiping away the debt. There are exceptions. 

Discharging Student Loan Debt: Exceptions

Here's the first major exception to the general rule that student loan debt cannot be discharged, cannot be wiped away: undue hardship. The debtor would have to prove undue hardship to the court. This can be financial, medical, etc. This is typically a very difficult standard to meet in most courts.

Here's the second major exception category for student loan debts. Not every debt to a college or university is student loan debt. Therefore, not every debt to a college or university is excepted from discharge. There are other kinds of debts, like unpaid tuition or bookstore fees. These are typically phrased as "accounts receivable." These may qualify for discharge during bankruptcy.

Student Loan Debt: What does the bankruptcy law say?

Bankruptcy law favors discharging debts and giving a debtor a fresh start. Therefore, the bankruptcy discharge is very broad. Consequently, exceptions to discharge are treated very narrowly.

Congress has identified the following debts as non-dischargeable, i.e. permanent or can't wipe away, under Bankruptcy Chapters 7, 11, 12, or 13:

• (A) Non-dischargeable student debts:
  • (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
  • (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
• (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;​

Besides Student Loan Debt, what other Student Debt is Non-Dischargeable in Bankruptcy?

This is the gray-ish area. That means this is typically where your bankruptcy attorney and your creditor's attorney get involved. 

Need a translation of the law above? Here you go. Non-loan Student debt which is non-dischargeable (can't wipe it away in bankruptcy) includes  the following:

• Qualifying loans, generally requiring evidence of a promissory note. 
• Educational payments made by the school to the student, as in an advance of cash or exchange of money.
• Owed college tuition, by itself, does not fit into the non-dischargeable category.

So, the signing of a promissory note is key. A promissory note is basically a contract you sign for the school including the magic words, I "promise to pay" the school. More specifically, a promissory note is an agreement signed on or about the time you start classes, providing for a definitive amount to be repaid, in specified installments, by a certain time, and at a certain interest rate.

What's the bottom line? If you attend classes without paying or signing a promissory note, you likely can discharge this debt in bankruptcy. The same principle applies to debts at the student union, gym, bookstore, and room and board debts. 

You may need a bankruptcy attorney to get rid of non-loan student debt

Your bankruptcy attorney can help you decide whether to fight a certain debt or not. The determination of whether a debt is dischargeable in bankruptcy is usually a complicated matter. Your bankruptcy attorney can explain to you how the local bankruptcy court will analyze the debt and the likely conclusion.

Any more questions? Probably so! Feel free to comment below. Remember to share this article, too! If you're wondering about this situation, odds are your friends are, too!