Say good bye to discharging student loans in bankruptcy except in very rare instances. In a move which surprised everyone except the parties involved, a Congressional conference committee sent a bill containing a provision eliminating student loan discharges to President Clinton who signed the bill on October 7.

The restrictions on the dischargeability of student loans have been steadily tightening, as have dischargeability restrictions on many other forms of debt. The changes reflect the power of several special interest lobbies and the general political mood on the country.

The current set of bankruptcy laws was passed in 1978 and in 1979 the section dealing with student loans was amended to make clear that no student loan which was guaranteed by the government or a non profit institution would be dischargeable unless that loan was more than 5 years old. In 1990 the law was amended to make the student loans non-dischargeable unless they were more than seven years old.

It is almost impossible to find a student loan that is not guaranteed by a non-profit institution. For-profit lenders regularly arrange some connection between their student loans and a non-profit institution just to ensure that the loan will be non-dischargeable in bankruptcy.

The bill which carries the change is H.R. 6 - The Higher Education Amendments Act of 1998. The bill passed the House with an amendment which eliminated the 7 year non-dischargeability provision from the bankruptcy code. However, the Senate version of the Act left the 7 year limit in place. Because of the differences in the two bills, the Act was sent to a conference committee which was supposed to resolve differences between the two bills. The conference committee indicated that there would be no change to the current law however, the bill which President Clinton signed provided for the elimination of the 7 year limit. How the provision remained in the bill despite assurances from the conference committee that it would be removed, is not clear.

What is clear, is that, with one exception, a student loan, no matter how old, can not be discharged in any bankruptcy case filed after October 8, 1998. The one exception to this rule is if the debtor can show that repayment of the loan would cause hardship.

Hardship has not been well defined in the 9^th Circuit which includes California. In one recent case a local judge adopted a test which asks three questions: 1) would payment of the loans cause a debtor's current standard of living to fall below that minimally necessary; 2) does the debtor have a dire financial condition which is likely to exist for a significant portion of the repayment period; 3) has the debtor shown good faith?

The tricky part of the test is the definition of "minimally necessary" in terms of standard of living. Some judges take this to mean real minimal and look to see if the debtor falls below the national poverty guidelines. Other judges take a less draconian view and feel they know minimal when they see it. The problem with using national poverty guidelines is that the guidelines are the same for both a family in Iowa and a family in Orange County. Anyone who lives here knows that the reality is quite a different matter.

Whatever the interpretation of hardship may be, it is quiet likely that since hardship has now become the only avenue of relief, the number of applications for a hardship discharge of student loan is likely to markedly increase in the future.

November 1998.
Reprinted with permission of the The Orange County Register.