Section 523(a)(8) of the Bankruptcy Code states that student loans cannot be discharged, unless payment of the student loans would impose an undue hardship upon the debtor or his dependents. This includes public and private student loans. The undue hardship burden is very difficult to meet. Generally, a discharge of student loans for undue hardship is only available to individuals who are not working due to a disability with no reasonable expectation that they will ever return to work.
However, not all student loans fall under Section 523(a)(8). Non-dischargeable student loans are those that: (1) have been made under a government or nonprofit student loan program, or (2) are a qualified educational loan for attending an eligible education institution as defined by the Internal Revenue Code. The loan must also be incurred to pay costs of attendance as defined in section 472 of the Higher Education Act.
If you attended a public university and your student loan bill comes from Sallie Mae, the chances are good that you have a student loan that is not dischargeable in bankruptcy except under the undue hardship rule. On the other hand, if you attended a for-profit school and obtained either a private loan from the school or from a bank, your loan may not meet the requirements of Section 523(a)(8).
For example, some for-profit technical or trade schools do not qualify as an “eligible education institution” because the school is not accredited under Title IV of the Higher Education Act. There may also be defects in the loan, like it was not incurred to pay costs of attendance. If a private student loan does not meet one of the criteria for a non-dischargeable student loan, the debt can be discharged in a Chapter 7 or Chapter 13 bankruptcy case and the exception listed in Section 523(a)(8) does not apply. Section 221(d) of the Internal Revenue Code contains a lengthy list of requirements which must be met before a loan can qualify as a student loan. If your loans fail to meet these criteria, you may be able to discharge them in your bankruptcy.
Student loans can be a heavy burden, but the federal laws offer options for repayment, deferment, reduction, and even discharge. Discuss your student loans with your attorney and review your legal options. In many cases bankruptcy can eliminate other debts that can allow you to afford repayment, or you can temporarily pay a reduced amount during a Chapter 13 bankruptcy. Your bankruptcy attorney is able to help you decide on a reasonable and affordable strategy for dealing with these pesky debts.