Law Offices of W. George Senft


Discharging Student Loans in Chapter 7 Bankruptcy

          The total amount of student loan debt is in excess of one trillion dollars.  Before the mid-1970s, debtors were able to get rid of student loans in bankruptcy court just as they could wipe out credit card debts or auto loans.

          However, in an effort to protect the taxpayers’ money, Congress toughened the law in 1990, in 1998 and then again in 2005, applying strict rules to federal and private student loans.  Today, approximately 10% of the combined student loan debt are private student loans, the rest being federally insured student loans.

          Federal loans are borrowed funds that you must repay with interest. A federal student loan allows students and their parents to borrow money to help pay for college through loan programs supported by the federal government. They have low-interest rates and offer flexible repayment terms, benefits, and options.  There are several types of federal student loans, i.e Federal Perkins Loans, Direct PLUS Loans, Direct Subsidized and Direct Unsubsidized Loans.

          A private student loan is a nonfederal loan issued by a lender such as a bank or credit union. If you’re not sure whether you’re being offered a private loan or a federal loan, check with the financial aid office at your school.

A. Discharge of Student Loans in Chapter 7 Bankruptcy

          The law to erase a student loan debt in a bankruptcy, no matter whether a private or a federal loan, is very tough. Student loans can be discharged only if the repayment of the loan would cause the debtor or the debtor’s dependents undue hardship.  To determine whether undue hardship exists, the three-part Brunner test is employed, Brunner v New York State Higher Educ. Services, Inc., 831 F2d 395 (2d Cir 1987).

          The Brunner test for a hardship discharge requires proof that:

1) the debtor cannot maintain, based on current income, a minimal standard of living for the debtor and dependents if forced to repay the student loan by its terms;

2) circumstances indicate that this state of affairs is likely to persist for a significant portion of the repayment period; and

3) the debtor has made a good faith effort to repay the loans.

          In defining undue hardship, courts require more than the showing of simple tight finances, rather the debtor’s economic situation has to stop short of utter hopelessness. The proper inquiry is whether it would be “unconscionable” to require the debtor to take steps to earn more income or reduce expenses.

B. Non-Bankruptcy Options

          The likelihood to have your student loan debt discharged in a bankruptcy is very low.  Therefore, debtors should consider the available options they have outside of the bankruptcy procedure

1. Statute of Limitation

          It is less common for the government to sue to collect on student loans because it has so many tools to use outside of court. Lawsuits are the main collection tool that private lenders have.

          The statute of limitations is a defense that is ordinarily asserted by the defendant to defeat an action brought against him after the appropriate time has elapsed. In plain English, the student loan creditor waited too long to sue you.  In state court, private student loans are subject to this defense, federal student loans have no statute of limitation.  In Oregon, the statute of limitation on oral or written contract is 6 years.

2. Other Common Defenses in State Court

          Other common defenses are that money was paid by you but not credited to the account; that the creditor miscalculated the amount due, i.e. the creditor may be seeking collection costs or attorney fees that are too high, or that someone fraudulently used your name.

          Also, military personnel has special rights.  If you are notified of a lawsuit against you while you are on active duty with the military, or within the first ninety days after you get off active duty, you can ask the court for a “stay.”

3. Deferment of Student Loans

          A deferment excuses you from making student loan payments for a set period of time because of a specific condition in your life — such as returning to school, economic hardship, or unemployment. Interest will not accrue on subsidized loans during the deferment period.

          The most common deferments are: being enrolled in school at least half-time; being unemployed and seeking employment, suffering economic hardship, serving in the military on active duty, called to service while enrolled in school, or serving in the Peace Corps.

          If you want to apply for a deferment, contact your student loan servicer.  If you do not know who your servicer is, then try this website:  The National Student Loan Data System, This is the Department of Education’s central database for student aid. You will find information about what kind of loan you have, loan or grant amounts, outstanding balances, loan status, and disbursements.

4. Forbearance of Student Loans

          In a forbearance, your loan holder gives you permission to stop making payments for a set period of time or to temporarily reduce payments. Interest continues to accrue during a forbearance. In some circumstances, a forbearance may be available even if you have defaulted.

          Forbearance on federal loans may be granted for a number of reasons, including poor health, unforeseen personal problems, inability to pay within the maximum repayment term (usually 10 years), or monthly payments totaling more than 20% of a borrower’s monthly income.

          To apply for a forbearance, contact your loan servicer.

5. Canceling Student Loans

          In certain limited circumstances, you may be able to cancel your student loan, meaning that you no longer have to pay it.  This is not easy because you have to meet specific conditions depending on the type of loan you have.  Student loans may be canceled due to school closure, i.e the school closed before you attended classes or while you were enrolled and attending classes.

Other situations that justify the cancellation of student loans are false certification, meaning the school did not make certain that you were qualified to attend the program. you work in certain occupations after graduation (like teaching or some public service jobs), or you are disabled or die.