Student loans are a special type of consumer debt. They are unlike credit cards, medical bills, auto loans, or home mortgages.
Almost anyone can get student loans when you go to school, and sometimes you don’t even need to go through a credit check. Once you get a student loan, it can follow you forever. Federal loans in particular have no statute of limitations (meaning the debts will never expire), and both private and federal loans can almost never be discharged in bankruptcy.
This wasn’t always the case. 2005 legislation passed by Congress and signed by President Bush amended the bankruptcy code to restrict bankruptcy discharges of student loan debt. There is currently pending legislation to reintroduce bankruptcy protections for some private student loans, but for now, it doesn’t look like the bill is going anywhere. Thus it remains exceedingly difficult to discharge any student loan in bankruptcy.
Difficult, but not impossible, as a recent case makes clear. To discharge student loans through bankruptcy, a borrower must prove what’s called an “undue hardship” or “undue burden.” This legal test is, despite the mushiness of the term, a tough standard to meet, as you essentially have to show that exceptional circumstances will prevent you from ever paying back your debt. One recent former law student (who did not graduate) with over $300,000 in student loan debt passed this test. She is 63 years old, diagnosed with Asperger’s syndrome and is unable to get a job because of her condition and inability to complete law school. A bankruptcy judge discharged her student loan debt, writing “[T]o expect Ms. Todd to ever break the grip of Autism and meaningfully channel her energies toward tasks that are not in some way either dictated, or circumscribed, by the demands of her disorder would be to dream the impossible dream.”
This case is a great example of the fact that it is not totally impossible to discharge student loan debt in bankruptcy. It is also, however, a stark reminder of how exceptional your circumstances must be to have a shot at this. To read more about this story, click here or here.