“Student loans can’t be discharged in bankruptcy,” has been repeated so often that it’s practically considered gospel. But what if that “fact” is not completely correct – and may be stopping consumers who could benefit from bankruptcy from pursuing it?
It’s not just consumers and the media that may be misled. “A wide number of bankruptcy attorneys are convinced that student loans can’t be discharged under bankruptcy and never even try to include them or pursue an adversary hearing to go for the discharge,” says Steve Rhode, who writes about discharging debt in bankruptcy at GetOutOfDebt.org.
Most Don’t Even Ask
Rhode points to research by Jason Iuliano, who delved into this issue as a Ph.D. student at Princeton University. (He also holds a law degree from Harvard.) Iuliano found that nearly 40% of student borrowers who seek a discharge get one, but that many borrowers don’t bother to ask. In fact, less than 1% of those who file for bankruptcy attempt to include these loans. “The real failing of the student loan discharge process is lack of participation by those in need,” he wrote in his research paper, An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard.
Yes, it can be difficult to wipe out student loans by filing for bankruptcy, but it’s not always impossible, and some consumers who might be able to eliminate student loan debt don’t even try. That can leave a borrower saddled with debt for decades, which not only hurts their credit rating but also leaves them in a situation where their balances just continue to grow.
To get rid of student loans through bankruptcy, debtors must file something called (ominmously) an “adversary proceeding” in which they have to prove that paying back their student loans would constitute an “undue hardship” on the debtor and the debtor’s dependents. But because Congress didn’t spell out what constituted an undue hardship, that job has fallen to the courts to interpret. And not surprisingly, various judges have held various positions on the issue.
The Major Factors
Looking at a variety of factors, Iuliano found only three that he said were “statistically significant across a wide variety of models”:
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whether the debtor has a medical hardship;
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whether the debtor is employed;
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and the debtor’s income the year before filing bankruptcy.
Those who had a medical hardship were more likely to be successful in obtaining a total or partial discharge, and it did not appear that there was a significant difference between mental illness, physical disability or chronic illness. As far as income and employment are concerned, there “is a clear and substantial dropoff in income as one proceeds from no discharge ($28,272) to partial discharge ($20,072) and, finally, to full discharge ($16,394),” he wrote.