You can erase student loan debt through bankruptcy

Ball and chain attached to man's legs

The idea that you can’t discharge student loans through bankruptcy? That’s just dead wrong.

Jason Iuliano, a graduate student in politics at Princeton University, looked at this issue in a study published last year and recently referenced in a New York Times story about student loan debt.

He examined bankruptcy cases filed in 2007, specifically looking for debtors with federal student loans to see if they filed lawsuits against their loan servicers as part of bankruptcy proceedings.

Such suits, called adversary proceedings, seek to have student loans discharged along with other debts.

He found 169,774 debtors with federal student loans.

Of those, less than 0.1% filed an adversary proceeding.

That's one-tenth of 1%.

This is stunning, especially in light of what he found next. Of those who did file, nearly 40% got some form of relief.

Shocked? I was, too.

The adage is that you can’t have student loans discharged through bankruptcy.

This started in the 1970s when doctors and lawyers would file for bankruptcy after graduating to get rid of their loans. So in 1976, Congress enacted a law that federal student loans could not be discharged through bankruptcy without the debtor proving "undue hardship."

They didn’t describe what that means, which leaves those decisions up to the courts.

Somewhere along the way, though, this transformed into the idea that student loans could never be wiped clean in bankruptcy, which, as Iuliano found, is not the case.

Now, to get your loan debt wiped clean, you still must be in dire straits. And you must ask for this relief in addition to filing for bankruptcy.

Iuliano found that those who were successful were less likely to be employed and more likely to have medical hardships and incomes of less than $20,000 a year.

In looking at these factors, he found 69,000 out of that pool of 169,744 with similar life circumstances who didn’t even give it a shot.

Iuliano laments that he doesn't have a bigger testing group and that he can’t do anything about it because it just doesn't exist. So few people made the attempt.

If you’re filing for bankruptcy and have federal student loans, try.

Iuliano found that having an attorney doesn't increase your chances of success and that the cost of filling the adversary proceeding was minimal compared to the cost of the overall bankruptcy filing.

With a 40% success rate of at least some relief, it’s worth the extra hassle.