Bankruptcy is a legal proceeding which allows a debtor to repay a portion of their debt either by liquidating their non-exempt assets or entering into a court approved repayment plan. Once the bankruptcy estate is administered or the debtor completes the repayment plan, the debtor is awarded a discharge of their remaining debt. Most loans and debt are dischargeable in bankruptcy, but there are a few exceptions.
11 U.S.C. § 523 of the Bankruptcy code outlines the various types of debts which are non-dischargeable. Some of the most common types of non-dischargeable debt includes, but is not limited to, domestic support obligations, debts incurred by fraud, and student loans. With regards to student loans, the code specifically excepts from discharge debts that are an “obligation to repay funds received as an educational benefit, scholarship or stipend” unless excepting this debt from discharge would impose an undue burden on the debtor or the debtor’s dependants. On the surface this language implies that bankruptcy courts would allow for students loans to be dischargeable if they are a burden on the debtor, however, in reality bankruptcy courts and judges rarely allow for a discharge of student loan debt.
The argument against allowing for student loans to be discharged in bankruptcy is that when a student graduates from college or grad school, they usually have very little assets and little disposable income in relation to their debt. Although they would have the potential to earn significant income in the future, they could simply file Chapter 7 upon graduation before they begin their professional careers, and the student loan debt would be discharged in a few months with little or no repayment.
Recently, both the U.S. House and Senate have introduced bills to allow for some types of student loan debt to be dischargeable in bankruptcy. S. 114 and H.R. 532 would allow for the dischargeability of student loans issued by private lenders such as SLM Corp’s Sallie Mae, Wells Fargo Corp. and Discover Financial Services. The bills would not apply to federal education loans, which comprise about 85 percent of the roughly $1 trillion in outstanding student debt in the U.S. This is the fifth time that these types of bills have been introduced in the House or Senate. Both bills have been referred to their respective Judiciary Committees.
Jonathan Bierfeld is an attorney with Martin Law Firm, P.L., whose practice focuses in Bankruptcy Law and Civil Litigation. He is admitted to practice law in the State of Florida and the Federal Court for the Middle District of Florida. He primarily practices in Lee County Florida in Cape Coral and Fort Myers, Florida.