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Cancel Student Loans In Bankruptcy? You May Not Qualify

This article is more than 3 years old.

Can you discharge your student loans in bankruptcy? A new proposal says yes, but not everyone qualifies.

Here’s what you need to know.

Student Loans

Rep. Mary Gay Scanlon (D -PA) introduced new legislation today that would make it easier for you to discharge student loans in bankruptcy if you are struggling financially and have been impacted by Covid-19. Here’s the good news: the COVID-19 Student 5 Loan Relief Act of 2020 would apply to both private student loans and federal student loans, and be available to all Americans impacted by Covid-19.


Discharge student loans: the fine print

Now, here’s the fine print: you may not qualify to discharge your student loans in bankruptcy under this proposal. According to the bill, to qualify:

  1. your income has been reduced due to the Covid-19 pandemic; or
  2. the primary income earner in your family died; or
  3. you have become permanently disabled

Now, lets’ break down the first requirement based on the language on the bill. The legislation requires a reduction in income due to Covid-19. What does this mean? Here’s what the bill says. It’s not enough that your income simply declined. Specifically, to qualify to discharge your student loans in bankruptcy

If you make less than this pre-tax income...your income must decline by at least this percentage...

  1. < $75,000 Income: at least 20% decline
  2. $75,000 - $125,000 Income: at least 30% decline
  3. $125,000+ Income: at least 40% decline

Plus, the relevant time period is “beginning January 21, 2020 and extending until 60 days after the duration of the Covid-19 emergency or the duration of the Covid-19 outbreak or as a result of the COVID-19 outbreak.” Even if you wouldn’t qualify under this specific proposal, you still may be able to discharge your student loans in bankruptcy through the normal course based on your financial situation. Traditionally, unlike mortgages or credit card debt, student loans cannot be discharged in bankruptcy. There are exceptions, however, namely if certain conditions regarding financial hardship are met.


Cancel student loan debt

This latest bankruptcy legislation is part of an ongoing effort to provide more student loan relief, particularly as as result of Covid-19. For example, Student Debt Crisis, a leading student loan advocacy not-profit, recently sent Sen. Elizabeth Warren (D-MA) a petition for student loan forgiveness with 1.2 million signatures. Warren, who proposed student loan forgiveness for 95% of Americans, has been a proponent of student loan forgiveness and student loan debt cancellation. Scanlon’s legislation would make it easier by amending Chapter 11 of the U.S. Bankruptcy Code, although the requirements to qualify may be challenging for some. Student loan forgiveness has been a hot topic in Congress, particularly in the wake of the Covid-19 pandemic. For example, former Vice President Joe Biden reiterated his support for student loan forgiveness and his support to discharge student loans in bankruptcy. Other members of Congress have proposed legislation to forgive student loans, although none have become law.


Will student loans be included in the new stimulus?

Maybe. It’s unlikely that this bill or a similar bill to discharge student loans in bankruptcy will be included in the new stimulus. The new stimulus package may be introduced next week. Currently, the focus includes second stimulus checks, state and local aid, unemployment benefits or a return-to-work bonus and liability protection due to Covid-19 for businesses. However, don’t expect student loan forgiveness to be included. However, Congress may extend student loan relief under the Cares Act, or Congress could allow the student loan relief to expire as planned on September 30, 2020. That said, student loans have not been the focus among Republicans (who control the Senate) among other high priority issues. There is bipartisan support to make student loans dischargeable in bankruptcy, but there may not be consensus to act until after the election in the next Congress.


Resources: Student Loans

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5 student loan changes for 2020

New stimulus may be introduced next week

Second stimulus checks may be less than $1,200

Second stimulus checks: your questions answered

What Trump and Biden think about your student loans

Second stimulus checks: your questions answered

Trump wants at least $2 trillion for next stimulus

5 ways to get student loan forgiveness

Navient settles lawsuit — what it means for your student loans

Student loan refinancing rates are incredibly cheap

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