Student Loans in Bankruptcy

Student loans are generally nondischargeable in bankruptcy. Unlike other forms of unsecured debt like credit cards or medical bills, student loans are excepted from discharge under Section 523 of the Bankruptcy Code.

§523. Exceptions to discharge
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt…
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
(A)(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

The language of Section 523 makes most student loans nondischargeable in bankruptcy, unless the debtor qualifies for the undue hardship exception. As articulated in Brunner v. New York State Higher Educ. Services, 831 F. 2d 395 – Court of Appeals, 2nd Circuit 1987, an undue hardship exists if…

(1)… the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2)… additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3)… the debtor has made good faith efforts to repay the loans.

The second prong of this test is particularly difficult to satisfy for most young borrowers. As stated in prong #2, “additional circumstances” (meaning something outside your control) must likely exist for a significant portion of the repayment period. Common “additional circumstances” that support an undue hardship include advanced age, mental illness, or disability.