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Can I file a bankruptcy to dump my outrageously enormous student loan debt? Yes, but it won’t be easy.

Unless the loan was from a private lender. In which case it might be easy-peasy.


Bankruptcy law, per the U.S. Constitution, is exclusively federal law. So, we look to U.S. Congress and federal courts for all things bankruptcy. In Congress’ bankruptcy code, education loans that are funded or insured by a government unit or a government-funded program are wiped out only if the debt imposes an undue hardship. Congress did not define in its code what an undue hardship is, so courts have had to thresh that out. And they came up with a humdinger analysis.

Many federal courts use a three-part test to determine undue hardship: 1) based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans; 2) your financial situation makes it unlikely you will pay off the loan during its repayment period; and 3) you have made a good faith effort to repay your student loans.

All three of these elements must be shown, and the burden is on the person filing bankruptcy. If you do not prove all three, then that government-backed student loan (or debt for an overpayment of a government-backed educational benefit) will not be wiped out in whole or in part in any bankruptcy.

What if it’s a loan that is not government-backed? A couple of federal appellate courts, along with a handful of other bankruptcy courts, have ruled that student loans from private lenders do not fall within those loans where you must prove an undue hardship. Thus, they are treated as any other debt that can be automatically wiped out.

However, there are also a few other courts which have disagreed. This is because another exception to automatic wipe-out in the code thereby requiring proof of undue hardship is where it is a debt arising from an “educational benefit.” Is a private student loan an “educational benefit”? Well of course, those other courts have said.

The courts that concluded private student loans can be automatically wiped out distinguish the phrase “educational benefit” to mean something other than a loan — they’re more like a grant, a tuition scholarship, or other financial benefit you get that has no obligation to repay unless you violated a condition of that benefit. Only then you will have to prove undue hardship to dump that debt.

Is your educated head spinning yet? This unresolved issue of private student lenders getting automatically wiped out or not could probably use a definitive ruling by the U.S. Supreme court. Or congress needs to redraft its murky code-drafting that occurred in the first place.

Like the tax code, the bankruptcy code is an amalgam of lobbying efforts in Congress by financial interests protecting their bailiwicks. Among those are providers of student loans, most especially government interests. 44 million Americans carry 1.6 trillion dollars of student loan debt. The exploding costs of higher education rivals the exploding costs of health care.

But, if you’re like me and get your law degree from the Judge Roy Bean Night School, you can keep those costs to a minimum.

Brett Kepley is a lawyer with Land of Lincoln Legal Aid Inc. Send questions to The Law Q&A, 302 N. First St., Champaign, IL 61820.

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