Can Student Loans Be Discharged in Bankruptcy in Massachusetts?

Can Student Loans Be Discharged in Bankruptcy in Massachusetts?

For years, one of the standard pieces of advice about bankruptcy has been: “It won't do anything about your student loans.”

That statement is too broad.

Student loans are certainly more difficult to discharge than credit cards, medical bills or personal loans. They do not ordinarily disappear simply because someone receives a Chapter 7 discharge. But federal law does allow certain student loans to be discharged when requiring repayment would impose an “undue hardship” on the borrower and the borrower's dependents. Justice.gov

And for federal student loans, the process has changed enough in recent years that I think it is worth taking another look at cases that might once have been dismissed as hopeless.

Filing Chapter 7 Isn't Enough by Itself

This is an important distinction.

Suppose someone files Chapter 7 with $60,000 in credit-card debt and $80,000 in federal student loans. The credit-card debt is discharged in the ordinary bankruptcy process.

The student loans are different.

Generally, the debtor must bring a separate case within the bankruptcy known as an adversary proceeding and ask the bankruptcy court to determine that repayment would create an undue hardship. The bankruptcy judge must actually make that determination before the student-loan debt can be discharged. Justice.gov

So merely listing the student loans on the bankruptcy schedules does not ordinarily eliminate them.

That does not mean they should be ignored.

The Federal Government Has Changed How It Handles These Cases

In 2022, the Department of Justice and Department of Education adopted a standardized procedure for federal student-loan bankruptcy cases.

That procedure remains in place today. The government says its purpose is to make these cases more consistent, reduce the burden on borrowers and make it easier to identify situations in which a discharge is appropriate. Justice.gov

A debtor seeking discharge provides detailed financial information through an attestation form. The government then evaluates the debtor's past, present and reasonably foreseeable future financial circumstances. When the facts support an undue-hardship finding, government attorneys can recommend that the bankruptcy court grant a full or partial discharge. Justice.gov

The bankruptcy judge still makes the ultimate decision. This is not an automatic student-loan forgiveness program.

But it is considerably different from simply assuming there is no point in trying.

What Kind of Situation Might Be Worth Reviewing?

Consider someone who is 62 years old.

She owes $95,000 in federal student loans incurred many years ago. She earns $42,000 per year, rents an apartment, has very little retirement savings and has no realistic expectation that her income will increase substantially before retirement.

After paying ordinary living expenses, there is little or nothing left each month to make a meaningful student-loan payment.

That is very different from a 30-year-old borrower earning $150,000 per year who simply would prefer not to repay $40,000 of student loans.

The government guidance looks at whether the debtor presently lacks the ability to repay while maintaining a minimal standard of living, whether that situation is likely to persist, and whether the debtor has acted in good faith concerning the loans. Justice.gov

Age can be relevant, but it is certainly not the only consideration. Disability, prolonged unemployment, limited earning potential, caregiving obligations, repayment history and other circumstances may also matter.

What About Someone Who Never Made Many Payments?

That does not necessarily end the inquiry.

One factor is whether the borrower made a good-faith effort concerning the debt. But good faith is broader than simply counting the number of checks sent to the loan servicer.

The current federal guidance allows consideration of such things as efforts to obtain employment, maximize income, minimize expenses and pursue appropriate repayment options. Justice.gov

Every case is different.

I would want to know why the loans weren't paid rather than simply seeing a poor payment history and concluding that a discharge is impossible.

Private Student Loans Can Be Different

Another mistake is assuming every debt labeled a “student loan” receives exactly the same bankruptcy treatment.

Section 523(a)(8) protects particular categories of educational debt. Whether a private loan actually falls within those categories can sometimes require a separate legal analysis.

The fact that money was borrowed while someone was attending school does not, by itself, answer every dischargeability question.

If a client has substantial private student-loan debt, I would want to see exactly what type of loan it is, who made it and what the money was used for before assuming it survives bankruptcy.

Bankruptcy May Still Help Even If the Student Loans Survive

There is also a practical point that sometimes gets overlooked.

Suppose someone has $70,000 in student loans plus $45,000 in credit cards, medical bills and personal loans.

Even if the student loans ultimately cannot be discharged, eliminating the other $45,000 may substantially improve that person's ability to deal with the student loans afterward.

The correct question isn't always, “Will bankruptcy eliminate every debt I have?”

Sometimes the better question is, “What will my financial situation look like after bankruptcy?”

Don't Automatically Write Off the Student Loans

I would not tell someone with student loans that bankruptcy will eliminate them. The Bankruptcy Code deliberately applies a more demanding standard to these debts, and many borrowers will not qualify. Justice.gov

But I also would not automatically tell a financially distressed borrower that student loans can never be discharged.

That is no longer a useful way to analyze the issue.

If you are considering bankruptcy and have substantial federal or private student-loan debt, Common Law Associates, LLP can review the loans along with your income, expenses and other debts and determine whether the student-loan issue deserves a closer look.