While technically you do have the ability to discharge student loans in a bankruptcy, in almost every case the courts do not allow you to discharge your loans. Declaring bankruptcy does clearly show financial hardship, but the federal government will still not allow you to completely discharge your student loan debt. The only way to rid oneself of student loans in a bankruptcy is if the payment of the loans would “cause undue hardship.” While most people would say having to pay high student loan payments when filing bankruptcy is an undue hardship, the federal government has a different opinion of this phrase.
Courts use various tests to determine what is undue hardship but the overall attitude is your specific situation must be so extreme there is no way you could ever pay off the loans. An example would be someone who has extremely high loans such as graduate, medical, or law loans and because of some circumstance they are no longer able to work. This person can likely never pay off their student loans in their lifetime. They must also show they have made a good faith effort to pay off their student loans in the past. The federal government says this normally means you should have been attempting to pay off your loan for at least five years. The idea is that this person has been attempting to pay off their loan in the past, but if they are forced to continue paying off the loan, this will force them into a minimum standard of living or poverty.
Lets look at an example of when student loans might be dischargeable. John Doe went to school to become a surgeon. He completed medical school and his residency and now has close to $550,000 of student loan debt. Although he has a lot of student loans he makes approximately $250,000 a year of income as a brain surgeon. He makes payments each month for a five-year period. Then, one day while out on the lake, John Doe dives into the lake from his boat and he failed to realize the water was shallow. He breaks his neck and becomes a paraplegic. In other words, he is paralyzed from his neck down. At the time of his student loans John Doe owes approximately $300,000. Due to his injury he will never be a surgeon again and is not likely going to find a job that will allow him to pay off his student loans. In this situation, the courts may determine that an extreme circumstance exists allowing for the discharge of student loans.
The courts are hesitant to discharge student loans because while it may be hard to pay your loans now, someday in the future you will be back on your feet and capable of making payments again. Many people believe they qualify for student loan discharge in bankruptcy but it cannot be stressed enough how extremely rare it is that someone is able to discharge their student loan payments in bankruptcy. This is a situation where you have the burden to prove to the court why you should be the exception and why your situation is different. The courts very rarely grant someone a discharge of their student loan debts.