Discharging Student Loan Debts through Bankruptcy


For a long time now, it has generally been understood that, with few exceptions, student loan debts could not be discharged through bankruptcy. This meant that for millions of Americans who went to college and had to take out student loans while working toward their degrees, the debts could hang over their heads for years and even decades. In New Jersey, New York, and everywhere else in the U.S., student loan borrowers had no choice but to arrange payment plans and figure out a way to add one more major debt obligation to their monthly bills. This left a lot of people in tight financial spots: according to the Wall Street Journal, there is currently more than $1.3 trillion in outstanding student loan debt on the books.

Recently, however, some individuals with outstanding student loans have had success when it comes to getting their private loans cancelled in bankruptcy court. This is important because bankruptcy can provide a person with a fresh start and a chance to move ahead with their lives. Some people might spend their entire lives trying to get out from underneath crippling debts, which is why bankruptcy can be a good option in many circumstances. The ability for individuals with student loans to file for bankruptcy would almost certainly improve their financial situations and make their lives a whole lot easier.

“Extreme Hardship” as a Hurdle to Discharging Student Loans

Under US bankruptcy law, anyone who borrows money for an “educational benefit” is generally barred from discharging the loan and cancelling the debt unless they can demonstrate “extreme or undue hardship.” So what exactly constitutes “extreme hardship”? Well, the exact definition of the term is open to interpretation, but one thing has been made clear by bankruptcy courts over the years: the threshold for proving extreme financial hardship is very high. Terminal illness or death are a few examples of the kind of hardship a debtor would need to show in order to get their student loans discharged through bankruptcy.

Some debtors are finding a way around the “extreme hardship” hurdle by successfully arguing in bankruptcy court that student loans to cover the costs of schools without accreditation were not for an “educational benefit.” The same argument is being made with respect to student loans that were used to help law students pay for prep courses and materials to study for the bar exam. If the loan was not for an educational benefit, say the debtors, then it is more like consumer debt and should be capable of being discharged through bankruptcy.

One major limiting factor in these recent cases is that only private student loans, not loans provided by the federal government, can be cancelled under the novel argument that the loans were not intended for an educational benefit. Since the vast majority of student loans are backed by the government, this means that plenty of student loan borrowers are still going to be in a bad spot when it comes to resolving difficult financial situations.

For more information, read the Wall Street Journal article, “Bankruptcy Becomes an Option for Some Borrowers Burdened by Student Loans.

If you have outstanding student loans, or any other debt obligations, you should speak with a qualified bankruptcy and debt management attorney. Joel R. Spivack, Esq., is an experienced debt relief and bankruptcy lawyer who will help you explore your best options for getting out of debt. Contact Mr. Spivack today to schedule a free consultation.


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Attorney Joel R. Spivack is an experienced bankruptcy and residential real estate transactions lawyer in Cherry Hill, New Jersey. Clients come to us for legal services, but what we really provide is peace of mind. For more than 30 years, Attorney Spivack has helped people make wise, informed decisions about bankruptcy filings, debt relief options and residential real estate transactions.
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