Can Bankruptcy Wipe Out Student Loans in PA, NJ, and NY?
Few debts feel heavier than student loans, and many people assume bankruptcy cannot touch them at all. The honest answer is somewhere in the middle. Student loans are treated differently from most other debts, but there is a legal path to discharge them in some situations.
The General Rule
Under the Bankruptcy Code, certain educational loans are not wiped out in bankruptcy unless keeping the debt in place would impose an "undue hardship" on you and your dependents. That rule appears in section 523(a)(8) of the Code. The statute does not spell out what undue hardship means, so the courts have filled in the details.
How Courts Look at Undue Hardship
Many federal courts use a three part test that began in a Second Circuit case, Brunner v. New York State Higher Education Services Corp., 831 F.2d 395. The Third Circuit, which covers Pennsylvania and New Jersey, adopted that test in In re Faish, 72 F.3d 298. In general, a court asks three questions:
1. Based on your current income and expenses, could you maintain a minimal standard of living for yourself and your dependents if you had to repay the loans?
2. Are there additional circumstances suggesting that this situation is likely to continue for a significant part of the repayment period?
3. Have you made good faith efforts to repay the loans?
In Faish, the court explained that all three parts must be met, and that the first part requires more than a showing of tight finances. In other words, being squeezed is not the same as meeting the legal standard.
It Is Usually Not Automatic
A student loan generally is not discharged just because you receive a bankruptcy discharge. Asking a court to find undue hardship usually means pursuing a separate proceeding within the bankruptcy case, often called an adversary proceeding, where the lender or loan servicer can respond. That takes preparation, documentation, and a clear picture of your budget and your history with the loans.
Important Caveats
Outcomes depend heavily on the facts. The type of loan, your income, your health, your family situation, and your repayment history can all matter, and different judges can see similar facts differently. Federal loans and private loans are not always treated the same way, and not every loan fits neatly into the statute.
It also helps to remember that bankruptcy can still be valuable even when a student loan remains. Eliminating credit card balances, medical bills, or other debts can free up monthly income, and stopping certain collection actions can give you room to breathe. Some borrowers will also want to look at repayment options available outside of bankruptcy.
What To Do Next
Before you stop paying anything or file anything, it is worth understanding how your specific loans and finances fit into the picture. Ames Law Group works with clients in Delaware County, Media, Philadelphia, Montgomery, Chester, and Bucks Counties, and in South Jersey, and can talk through where you stand without pressure.
If you are weighing bankruptcy and have student loans in the mix, contact Ames Law Group to discuss your situation.
This post is general information and not legal advice.
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