Under current law, it is nearly impossible to discharge student loans in bankruptcy. As commentators have noted, current law requires that the debtor demonstrate that the debt presents an "undue hardship." In a landmark bankruptcy case, In re Brunner, the Court suggested that a debtor could only demonstrate undue hardship by proving that:
- Based upon the debtor's current income and expenses, he or she is unable to maintain a minimal standard of living if required to repay the loans.
- The debtor's current financial situation is likely to continue for a substantial part of the repayment period.
- The debtor has made a good faith effort to repay his or her student loans.
As a practical matter, this requires that a debtor (who is presumably destitute) to file a lawsuit known as an "adversary proceeding" in bankruptcy court, hire expert witnesses, and pay for all of the attorneys' fees and costs incurred in the litigation.
Making matters worse, Congress has eliminated the statute of limitations on collection of student loans--including private student loans! As a result, borrowers who make the mistake of incurring excessive student loan debt at a young age can be saddled with these debts for life.
In short, the current system is broken.
A recent new article suggests that Congress may change the law to make federal student loans dischargeable in bankruptcy after ten years in repayment. Doing so would provide substantial relief to borrowers who, under the current system, are stuck in debt purgatory with no ability to get relief. Let's all hope that Congress does the right thing!