Home > Student Loans > Will You Finally Be Able to Get Rid of Your Student Loans in Bankruptcy?

Comments 11 Comments

This week the White House announced a new Student Aid Bill of Rights, which aims to help federal student loan debtors with better options and more clarity in dealing with their problem student loans.

While most of the new initiatives announced are geared toward eliminating unnecessary payment hurdles and make dealing with federal student loan repayment options easier, one section points to an important shift in government policy.

Many people continue to suffer under the misunderstanding that student loans can’t be discharged in a consumer bankruptcy. While student loans might currently be onerous to discharge in bankruptcy, some are very easy to eliminate. Take for example, these private student loans.

For the past couple of years I’ve been studying the elimination of student loans in bankruptcy. What is surprising to people I share this information with is that both federal and private loans have been and continue to be discharged by skilled bankruptcy attorneys who understand this shifting landscape.

The reality about discharge was first studied by Jason Iuliano, a Harvard trained lawyer. Iuliano discovered the reality of student loan discharge in bankruptcy was that four out of 10 who attempted to discharge their loans were successful.

Granted, a 40% rate is not success for the majority, but it’s not inconsequential either. More disturbingly, he found that in just the one study year, 69,000 debtors would have been good candidates to receive some or full relief from their student loan debt but they never even tried to discharge the loans. In fact, few ever try to discharge their student loans in bankruptcy. “99.9% of student loan debtors in bankruptcy never attempt to get a discharge,” says Iuliano.

The vast majority of bankruptcy attorneys continue to tell consumers a discharge is just not possible. One reason is the tough go the federal government and student loan lenders have given attorneys in the past. Student loan defendants have been forced some debtors and attorneys to enter expensive litigation to prove the loans create an undue hardship and should be legally eliminated in bankruptcy.

But in the Student Aid Bill of Rights announced this week, one section in particular points to the government making it easier for struggling students to eliminate their debts in bankruptcy.

Section 3(b) says, “By July 1, 2015, the Secretary of Education shall issue information highlighting factors the courts have used in their determination of undue hardship, to assist parties who must determine whether to contest an undue hardship discharge in bankruptcy of a Federal student loan.”

One way to read this might be the government desires to make a discharge more difficult but buried in the same Bill of Rights is another section where the government wants to provide additional protections for student loan borrowers: “After assessing the potential applicability of consumer protections in the mortgage and credit card markets to student loans, recommendations for statutory or regulatory changes in this area, including, where appropriate, strong servicing standards, flexible repayment opportunities for all student loan borrowers, and changes to bankruptcy laws.”

It clearly appears to me the government is signaling coming clarity to make the undue hardship discharge of federal student loans easier through a unified set of guidelines that bankruptcy attorneys and courts will be able to use to make the elimination of federal student loans a swift and affordable process.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More on Student Loans:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Alicia M

    Hi Steve,
    Did anything happen this July 1st with section 3(b)?

  • Anon Person

    OK Steve, I know you told me “you are WAY BUSY”… but I really would like to know if this so called “Student Aid Bill of Rights announced this week” is going to pass and be made law or what? My defaulted consolidated student loan debt is now pushing $130K and climbing each month, the Dept. of Ed. is garnishing my Social Security and small Fed Pension (for several years already)… meanwhile, I am left with trying to survive in the DC area on $1200.00 a month! I was on SSDI until the Social Security Amin. changed me over to straight SS annuity based on my age. I am now 67 years old unable to work and have no other means of income, no life insurance, the basic Medicare, and no MONEY anywhere! I am BANKRUPT and without hope and want to say goodbye cruel world!

    • http://www.Credit.com/ Gerri Detweiler

      @Anon Person – There are a few reputable credit counseling agencies now providing low-cost assistance to consumers with student loan problems and you sound like an ideal candidate for that kind of help. I am not sure where to find a list of them but I did speak with one agency this week that offers that counseling – Cambridge Credit Counseling.

      • Anon Person

        Golly Gerri, you are such a sweetheart. But my situation is WAY beyond low cost counseling services! Appreciate the email. Seems the so called bill that the congress is floating out there is for holders of private loans – mine are all defaulted Federal Loans! Going to file my pro se case under 11 U.S.C §523 (a)(8). At my advanced age, poverty level, and medical condition I have little to lose anyways! 🙂

        • http://www.Credit.com/ Gerri Detweiler

          Do let us know how it works out for you.

          • Anon Person

            Gerri, I am working on it every day. With God nothing is impossible! <3

    • http://GetOutOfDebt.org/ Steve Rhode

      I have no confidence any bill is going to pass quickly. Bills have been presented for the past few years, but go nowhere. As far as stopping a garnishment there is a process that works. Check out https://getoutofdebt.org/63335/easiest-way-stop-student-loan-wage-garnishment-loan-rehabilitation But I think this article on how to stop a student loan Social Security garnishment will help. https://getoutofdebt.org/50582/how-to-easily-stop-a-social-security-wage-garnishment

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team