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Can I discharge my student loans?

The answer is complicated. Generally speaking, student loans are exempt from bankruptcy discharge unless the borrower can show undue hardship and the onset is caused by some exceptional circumstances such as a serious illness or permanent disability.

However, it can and has been done. Because many consumers believe student loans cannot be discharged through bankruptcy at all, they do not make an attempt. According to US News, in a 2011 study by Jason Luliano, 40 percent of those who did include student loans in their bankruptcy were able to have the debt discharged. While student debts are sometimes discharged, court decisions vary from state to state because "undue hardship" has not been clearly defined.

An attempt to define hardship

In October 2015, Robert E. Murphy took his case to the First Circuit Court of Appeals over the right to have his Parent Plus loans discharged. Murphy lost his six-figure income in 2002 when his longtime employer moved overseas. Even if he were to find a job and pay well past retirement age, the loans would still grow to half a million dollars with the interest--making it impossible for him to reasonably pay them off.

Murphy's counsel argued the court should clearly define "undue hardship" as it relates to student debt. Additionally, an attorney from the National Consumer Law Center submitted a brief supporting Murphy's argument. Many more kept a close eye on the case because it meant possible changes to how student loans would be handled in future bankruptcy cases.

What was the outcome?

The Court of Appeals is off the hook, for now, because the case settled earlier this year. Educational Credit Management Corporation, who assumed the debt from the Department of Education, agreed to let Murphy discharge his educational loans. Only time will tell if the bankruptcy court accepts the agreement, if it is sent back to the appeals court or if someone else challenges the definition in the future. 

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