As most people are aware, student loans generally cannot be eliminated by filing for bankruptcy since they are not considered “dischargeable” under the United States Bankruptcy Code (the “Code”).   As with most things in life however, there are some very limited exceptions to this rule.  Under Section 523(a)(8) of the Code, there are two exceptions to the typical “non-dischargeability” of student loans that are provided in more detail below.

Pursuant to the first exception, student loans may be dischargeable if the loans were not insured or guaranteed by a government entity.  Moreover, student loans may also be eliminated if they were not issued pursuant to a program that is funded in any capacity by a government unit or non-profit organization.  Since most students have loans that were provided by the United States Department of Education, they are unable to meet these requirements.  However, private loans that were issued by a bank do not meet this exception since their institution is likely insured by the FDIC, or Federal Deposit Insurance Corporation.

Under the second exception, student loans may also be discharged in the event of an “undue hardship” experienced by a debtor and their family.  Known as the “undue hardship” criterion, this is extremely difficult to satisfy since the standard is set very high.  For example, the Code takes into account the fact that many people will face unemployment after graduation or during a downturned economy, making it difficult to repay their loans.  Accordingly, these reasons alone unfortunately do not warrant the elimination of one’s student loan debt.

The ability to meet the undue hardship criterion is specific to the facts and circumstances present in each case. For instance, if a debtor experiences the death of a spouse or child, traumatic life event such as a house fire, debilitating illness or terminal disease, or faces some other tragic situation, a court may discharge his or her loans.

In the event that any of the above exceptions are met, it does not mean that an individual’s debts will automatically be eliminated.  Specifically, a debtor may be required to undergo a number of procedures governed by the Code in order to obtain a discharge of their student loan debt.  Since each jurisdiction differs in terms of their individual requirements in this regard, it is crucial to work with an attorney who knows the bankruptcy’s laws and the local court system.   Otherwise stated, the local court rules, requirements and prior judicial options govern how cases will be handled by a court in a specific area.  Only an attorney who has handled bankruptcy cases before will be able to fully advise you as to the scope of your legal options.

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If you think you may be eligible to seek a discharge of your student loan debt, contact my office today for a free consultation.  I will take the time necessary to evaluate your financial situation and offer you solutions to address your debt situation.  If bankruptcy is not right for you, I will assist you in determining what alternatives may help you better manage your debt and improve your financial circumstances.