Years ago it was a common belief that students who could not afford college could take out student loans, wait until after graduation, default on their loans, file for bankruptcy, and walk away with what was essentially believed to be a free education. While those who took out those loans with the intention to file for bankruptcy later on were obviously committing a fraudulent act, there were no limitations to the bankruptcy laws that prevented this from happening. As regulators caught on, the laws regarding bankruptcies and student loans slowly began to change.

There were two main changes to the bankruptcy laws that had huge impacts on the way student loans were treated. One change came in 1998 and the second came in 2005.

The first change to the bankruptcy code, put in effect in 1998, made it impossible for a student to discharge (eliminate in bankruptcy court) his federal student loans for any reason except for substantial hardship. Anyone attempting to prove a hardship must prove that he can not maintain a minimum standard of living while at the same time repaying his student loans. He must also prove that it is unlikely his situation will change over a reasonable amount of time. Some courts still will not allow a debtor to discharge the entirety of the loan – requiring the debtor to repay part of the loan while discharging the remaining balance.

The second change to the bankruptcy code went into effect in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. These changes included private student loans in the list of non-dischargeable debts. In order to discharge a debt created by a private student loan the debtor must, again, prove that paying the loan would cause undue hardship.

The only exception to the student loan rules impacts students who took out loans to attend schools that subsequently closed. If your school closed before you completed your program you may be eligible for inclusion of your student loans on your bankruptcy petition. Ask your bankruptcy attorney for guidance as you explore this part of the process.

Some individuals find that filing for bankruptcy may still help, especially if student loans are not the only source of financial hardship. Individuals who eliminate their other debts often find it easier to make the minimum payments on their student loans and can sometimes pay them off faster than they would have been able to if they were forced to continue juggling their other debts. Other alternatives include:

• Rehabilitating your student loans,
• Consolidating your student loans, and
• Asking for lengthened repayment options.

Most student loan lenders recognize the need to work with students who are experiencing financial hardship or who are having difficulty finding gainful employment right after graduation. Make sure you call your lender to find out what options are available. If nothing works out, consult your bankruptcy lawyer for help in determining if your situation qualifies you for the undue hardship exemption.