For the vast majority of borrowers, student loans are not dischargeable in bankruptcy. This is true for both government loans and private loans (lawmakers eliminated the distinction between government and private loans in the 2005 amendments to the Bankruptcy Code). Student loans can be discharged for those who can show that the loans are an “undue hardship.” Bankruptcy Courts have implemented different tests in determining whether a debtor is facing undue hardship. The most popular test is a three-prong test first outlined by the 2nd Circuit in Brunner v. New York State of Higher Education. That Court said that in order for a debtor to prove an undue hardship, he or she must show:
1. The debtor/borrower cannot maintain a minimal standard of living for themselves (and dependents if forced to repay the student loans; and
2. That additional circumstances exists indicating that the hardship is likely to continue for a significant portion of the repayment period of the student loans; and
3. That the debtor/borrower have made good faith efforts to repay the student loans.
Colorado Bankruptcy Courts have adopted a modified version of this test and also look at whether the debtor/borrower is intentionally creating their hardship.
Even in cases where an undue hardship exists, discharging student loans in bankruptcy is difficult. In addition to filing for bankruptcy protection, a borrower must also file an Adversary Proceeding in Bankruptcy Court in order to discharge their student loans. Adversary Proceedings can be expensive and time consuming and generally require the assistance of an experienced bankruptcy attorney.
The fact that these loans are, for the most part, non-dischargeable in bankruptcy makes it very difficult to settle student loans. Banks will generally settle credit card debt or other loans for a portion of the amount owed (often 50% or less). With student loans, these same banks are unwilling to entertain any settlement offers, knowing that the student loans cannot be discharged in bankruptcy.
If you are considering seeking a discharge or a settlement of your student loans, you should contact an experienced bankruptcy attorney who can best advise you of your options.