Yes, It Is Possible to File Bankruptcy on Student Loans

When Uniondale, N.Y.-based Natalie Jean-Baptiste graduated from law school with a six-figure student loan debt, it never occurred to her that she wouldn’t be able to pay it back.

“I just knew I was going to be a hotshot entertainment attorney and pay it off in no time. I dreamed of red carpet events, Grammy parties and hanging with my clients in the Hamptons. I never ever dreamed I’d end up in bankruptcy court, let alone become an expert on bankruptcy.”

But she did, indeed, become an expert on a very narrow — and extremely important — area of bankruptcy law, which can be a true godsend to the thousands of people so burdened by student loans that they will never be able to pay them off and live a normal life. Her own experience led to a path in law “so much more rewarding than I could ever have imagined,” Natalie told me. “I get to help people drowning with student loan debt.”

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

And before going further, this column is not advocating cheating legitimate lenders out of their right to be repaid for making a student loan. Rather, recent history is filled with stories of loans that should never have been made for worthless college programs leaving debtors close to homeless. The next presidential election may address some of these abuses, but for now, for some people, there is a way out of crushing student debt, as you will see.

Popular Misconceptions – There’s Nothing You Can Do About Student Loan Debt

“One of the biggest misconceptions about student loans is that it is impossible to have these loans discharged in bankruptcy,” she points out.

“Most attorneys will even tell you that. While the path to discharge is challenging, it is possible and I accomplished this for myself,” she says, adding, “Do not trust student loan resources, and even student loan lawyers, who tell everyone to forget about filing bankruptcy. Either they are poorly informed, or have an agenda which is not in the debtor’s best interest.”

A Brief History of Student Loan Debt and Bankruptcy

Prior to 1976, student loans could be discharged in bankruptcy easily. But in 1998, Congress significantly modified bankruptcy law to only allow a discharge if repaying student loans created an “undue hardship.”

In her own experience, “I was a good fit for the undue hardship claim, and there are thousands of people across the country in the same situation as I was.” She summarized the criteria for a finding of undue hardship:

“The Brunner test is used by the most bankruptcy courts, and requires a finding that:

1. You can’t maintain a minimal standard of living for yourself and your dependents and afford the monthly loan payments.
2. The current circumstances are likely to persist for a significant portion of the payment period.
3. You made a good faith effort to repay the loan by maximizing your income and eliminating unnecessary expenses.

How to Get the Ball Rolling – Not a Slam Dunk

Natalie wants readers to understand this is not a slam dunk. “First, you need to find a bankruptcy attorney who is familiar with the undue hardship rules, as many are not.

“It is important to understand that you will be filing for bankruptcy, and, as you are claiming an undue hardship, this will be decided in what is called, ‘An Adversary Proceeding’ in bankruptcy court. This is a real lawsuit, as the creditor wants to be paid and you are trying to demonstrate why the loan should be forgiven.

“You will appear before a judge who will most likely use the Brunner Test to decide if you have an undue hardship.

“If you can prove all three of these elements, you are entitled to a discharge,” but you’ve got a lot of work to do, beginning with conducting discovery.

“Be prepared to provide financial records, tax returns, bank statements showing your financial resources, proof of expenses, housing, utilities, food, etc. You will need to present a detailed picture of your financial life.”

She also wants readers to understand that not all student loans are “Qualified Education Loans.”

“For example, a private bank making a loan where the amount exceeds the published cost of attendance might not be a qualified loan and therefore is dischargeable without having to show undue hardship.”

Nathalie believes that most people can do this on their own, as she did. “I knew nothing about bankruptcy before teaching myself. There is hope for people who are underwater! The hardship exception works, it really does. The myth that you can’t discharge student loans is a popular misconception. It can be done.”

Her website (mystudentloancounselor.com) is well worth the time for anyone facing crushing student loan debt.