Chapter 13 Bankruptcy Information

The current standard for discharging student loans is “undue hardship.”  Over the last three decades, Congress has made it increasingly difficult to discharge student loans.

The chronology of this noose tightening around debtors’ necks is as follows:

• Student loans were dischargeable throughout most of the 20^th century.
• In 1976 Congress enacted the Education Amendments, and in section 439A of that Act made student loans non-dischargeable if the first payment came due within five years of bankruptcy unless the debtor could prove “undue hardship.”
• In 1978 Congress repealed the Bankruptcy Act of 1898 and replaced it with the Bankruptcy Reform Act of 1978—the “Bankruptcy Act” then became the “Bankruptcy Code.”  The Bankruptcy Code adopted the Education Amendment provision in original section 523(a)(8): no discharge unless the first payment became due more than five years prior to the bankruptcy filing or the debtor could demonstrate undue hardship.

The call for the non-dischargeability provision in the Education Amendment dated back to the early 1970s.  The perceived need for a non-dischargeability provision stemmed from a few extreme cases of doctors, lawyers, and other professionals discharging student loans prior to beginning lucrative careers.   The idea was that if the remedy of a bankruptcy ischarge was disallowed for five years, those students would become established in their careers and be able to repay their student loans.

Prior to the passage of the Bankruptcy Reform Act in 1978, the House and Senate disagreed strongly about the dischargeability of student loans.  The House favored the pre-1976 Education Amendment standard of treating student loans like any other unsecured debt, while the Senate supported the Education Amendment provisions limiting discharge.  In the end, however, the Senate won out, and Congress adopted the non-dischargeability provision of the Education Amendment.

Since 1978 there have been additional developments under the Bankruptcy Reform Act, all of which have had negative consequences for debtors.

• In 1990 Congress extended the time for discharge from five years to seven years; and
• In 1998 Congress completely eliminated the ability of debtors to discharge debts, except in cases of undue hardship.

Current Law Under BAPCPA

• “Student Loan” means virtually any loan to almost any student

Our current bankruptcy law is known as BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act).  BAPCPA further restricted debtors’ ability to discharge student loans by broadening the scope of what fell within the student loan exception to discharge.  The exception now applies to virtually any loan program of any kind, whether guaranteed by the government or purely a purely private program.   I discussed the broad definition of the term “student loan” in Part One of this series.

• The Standard for Discharge is Still Undue Hardship

The current standard for discharging student loans has remained the same since 1998.  The debtor must show that repayment of the loan would cause “undue hardship.”  In “The Worst Debt You Can Have: Student Loans (Part Three),” I’ll discuss what debtors must prove to show undue hardship.

Russell A. DeMott is a Charleston, South Carolina bankruptcy lawyer representing debtors in Chapter 7 and Chapter 13 bankruptcy.

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