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For years, many borrowers were told that student loans could never be eliminated in bankruptcy. That belief kept countless people from even asking the question. The truth is more nuanced. Federal and many private student loans can be discharged when repaying them would cause undue hardship, and recent changes have made the process more workable than it once was. For Iowa borrowers, the legal standard applied in their region may also be more flexible than in other parts of the country.
Why Student Loans Are Treated Differently
Most unsecured debts, like credit cards and medical bills, are discharged automatically at the end of a Chapter 7 or Chapter 13 case. Student loans are an exception. To have them discharged, a borrower must file a separate lawsuit within the bankruptcy case called an adversary proceeding and prove that repayment would impose an undue hardship.
What an Adversary Proceeding Is
An adversary proceeding is a lawsuit filed in bankruptcy court. In a student loan case, the borrower asks the court to declare the loan dischargeable. The lender or loan servicer, and in federal loan cases the government, has the opportunity to respond.
Basic Steps in the Process
- File a Chapter 7 or Chapter 13 bankruptcy case
- File a complaint to determine the dischargeability of the student loans
- Serve the complaint on the loan holders
- Exchange financial information and supporting evidence
- Negotiate a resolution or present the case to the judge
Many cases are resolved through agreement rather than a full trial.
How Undue Hardship Is Evaluated in Iowa
Different federal courts use different tests for undue hardship. Iowa falls within the Eighth Circuit, which applies a “totality of the circumstances” approach. Rather than following a rigid formula, the court looks at the borrower’s overall situation, including:
- Past, present, and reasonably reliable future financial resources
- Reasonable and necessary living expenses for the borrower and dependents
- Any other facts and circumstances relevant to the case
This approach can give courts more room to consider real-life factors than the stricter test used in many other regions.
Factors That Can Support a Hardship Claim
- A disability or chronic health condition that limits work
- Age, especially for borrowers nearing retirement
- Long-term low income despite reasonable efforts to find better work
- Dependents who rely on the borrower for support
- A degree that never produced the expected income
- Good-faith efforts to repay or enroll in repayment programs
Recent Changes for Federal Student Loans
In recent years, the Department of Justice and the Department of Education adopted guidance that simplifies how the government evaluates federal student loan discharge requests in bankruptcy. Borrowers provide detailed information about their finances and circumstances, and government attorneys use that information to decide whether to support a discharge. This has led to more cases being resolved without contested trials.
Private Student Loans
Private student loans are also generally subject to the undue hardship standard. However, some private education loans may not qualify for that protection at all, depending on how they were used and whether they meet the legal definition of a qualified education loan. Reviewing loan documents carefully can reveal options that borrowers didn’t know they had.
Partial Discharge and Other Outcomes
Not every case ends with the full balance eliminated. Possible outcomes include:
- A full discharge of the student loan balance
- A partial discharge that reduces the balance
- A negotiated settlement with the lender
- A denial, leaving the loan in place
Alternatives to Consider
An adversary proceeding isn’t the only option. Some borrowers may benefit from income-driven repayment plans, disability discharge programs, or loan forgiveness programs. Comparing these paths helps determine which offers the best long-term result.
Getting Help With a Student Loan Case
Discharging student loans through an adversary proceeding requires careful preparation, detailed financial documentation, and an understanding of how courts in the region evaluate hardship. A student loan lawyer in Dubuque, IA, can review your loans, assess whether your circumstances support a discharge, and handle the proceeding from start to finish.
Documents to Gather
- Current student loan statements and servicer information
- Income records and recent tax returns
- A list of monthly living expenses
- Medical records, if health affects your ability to work
- Records of past repayment efforts or repayment plan enrollment
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