December 15, 2019

Can Long Term Unemployment Support a Claim for Hardship Discharge of a Student Loan

With the economy headed south, I am hearing from more and more people who have either lost their jobs or who have been unemployed for a while with little hope of finding employment soon.  Some of these folks have outstanding student loans and they are not happy at all when the U.S. Department of Education or other student loan servicer grabs their tax refund to pay all or part of an outstanding student loan.

Unlike other creditors, student loan creditors do no have to sue you and obtain a judgment in order to collect from you.  Blog reader Nancy describes a disheartening scenario:

I am dealing with a student loan that’s 25,000.00 and the Department of Education took my tax return from me. I am a single mother with a special needs child and needed every bit of that money. I have been on unemployment since Jan of 08.  Things are not looking up for me in finding employment in my area. I am roommateing with a friend just to make ends meat here and I was told that maybe filing for a chapter 7 would be good for me. I have no credit card debt but I do have some hospital bills. Not sure what I need to do, I know that I can not afford this 25,000 student loans which by the way started out only 15,000. Interest has taken over and made it an impossible dept to pay off.  Please tell me what I should do. I also cant afford to have my taxes taken away every year from something that will never be paid off due to those interest rates.

Here is my response: As a general rule, bankruptcy is not a good tool to reduce or eliminate student loans.  Many years ago, when I first started my bankruptcy practice, you could discharge student loan debt.  Over the years, Congress has whittled away that option.   Now, not only are student loans protected from bankruptcy discharge – except in very limited situations – but student loan creditors can seize tax returns and garnish wages without first going to court to obtain a judgment.   In some respects, student loan debt has almost as much priority as child support or tax debt.

The only possibility for student loan discharge may be found at Section 523(a)(8), which denies a bankruptcy discharge to

an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

– any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents

As you can see, therefore, the only mechanism to discharge student loan debt is to claim that not discharging the debt would create an “undue hardship” on the debtor and the debtor’s dependents.

As you might imagine, shortly after Section 523(a)(8) went into effect, a number of debtors filed paperwork in bankruptcy asking judges to discharge their student loans based on this undue hardship language.   The result of these attempts has not been positive for debtors.  For the most part, judges in the Northern District have been extremely reluctant to permit the discharge of student loan debt.   In the few cases where discharge has been granted, the basis for the hardship usually has been medical – i.e., a debtor has a debilitating condition that would preclude any type of substantial work.    There have also been a few cases in which judges have partially discharged student loan debt even when it is very much unlikely that the debtor will ever have the financial capacity to pay back his student loan debt.

In my reading of these cases, judges have not been sympathetic to the “I am unemployed and don’t expect to find a job soon” argument.  Often the judges look at the debtor’s education, health and potential earning capacity and take the position that at some point in that debtor’s life, he will find a decent job – or at least a job that will allow for repayment of the student loan.

Because bankruptcy is a very limited and unlikely option, student loan creditors are rarely willing to work out any kind of repayment deal.  They know that they can garnish wages or seize tax refunds so they have very little incentive to strike a deal.

In Nancy’s case there does seem to be a medical element present – the cost of raising a special needs child, but that argument would need to be developed and reviewed in light of applicable case law.  Again, in my view at least, the unemployment argument will not go very far.

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.


  1. Obama promised to make college more affordable in his non-State of the Union. Do you think the new government will address rising bankruptcy and rising student debt in a way that would help these cases?

    Furthermore, I know of many cases where people have paid for their houses in full by the time they go off to college, but even if their income would suggest aid, the value of owning the home pushes them out of the financial aid bracket and they have to take out massive student loans. With housing values plummeting, do you see this policy being reformed anytime toon, either with federal or college-based aid?

  2. No and no.

  3. Dawn Jackson says

    I have read these comments I have a very similar problem. I have a student loan that I took out about 10 years ago. I ended up defaulting on this loan because my husband became disabled and there was a significant loss of income I tried to remedy this but Pioneer Credit and Recovery were snakes they couldn’t care less what my situation was all they wanted was my money no matter what. I started working for the State and right away they began garnishing my wages about 360.00 a month involuntary so they put it. I tried to get the loan placed in a voluntary payment status but, in order for me to do this I had to pay them 180.00
    on top of what they were garnishing already . I would have had to pay this every month for 9 months in order for them to allow me out of default status. I could not afford to pay this I had a family to feed. that would have taken almost 700.00 dollars a month from an already struggling household. I continued this garnishment status for 5 years and I have already payed on this loan to the amount of 14000.00 dollars. My original loan was only 8000.00 dollars. I spoke to a new service that took over this loan because I haven’t worked since May of this year and they tell me I still owe 10.000.00 on this loan. I cannot believe after they have already taken 14.000.00 dollars from me on an 8.000.00 loan
    that I can possibly still owe 2.000.00 over the original amount. The collection agencies are being payed outrageous amounts of money to collect these debts even though it’s being garnished they still get paid. The government is charging 1.73 cents ( A DAY ) on these loans. This is how the government keeps the population poor. There is now way to get out from underneath the Federal Government. Once you owe on a student loan they will take every penny you have and at the rate of interest and the charges from these shady companies you will never be able to pay these loans off. I am trying to go to the Media and get the word out about these student loans. Students that are borrowing money now will not be able to repay them. this economy can not support the amount of student work force and they will find themselves in major hardship when employment cannot satisfy the debt they have accrued by applying for these loans. The Government knows these statistics and yet they continue to advertise these loans without explaining the true facts about repayment. I am at the end of my rope with this loan and I don’t want one more uneducated student to fall prey to a defaulted student loan.

  4. Carolyn Heaton says

    While in college and while earning a masters degree and spending 2 yrs. as a doctoral student in psychology I created mucho student loan debt. After two years in my doctoral program the student loan paople (SallieMae or /and others) refused to loan me the rest of the money to complete my last 3 years. Hense I had to leave school and finally found a job for $23,000.00 a year. The period for deferment was over long ago, and from the $150,000.00 I owed to the $208,000.00 I now owe due to interest etc. the highest salary per year I have worked has earned me abour $37,000.00, with a payback amount of $700.00 plus or minus, a month, of which I have been paying $100.00 per month until I was layed off in Sept. 2011. I had to take early retirement at 65 yrs old in order to get money to pay my mortgage. I have not found another job yet. I am considering bankrptsy but the only thing I have is my home and I don’t want to lose it. I owe about $50,000.00 in credit cards which also was used for my schooling. The Geds have been taking my tax return for the last three years, for the one student loan I never had, at Argosy University in 2000 and 2001 which claims I did have it for $4000.00. I have sent them proof of never having that loan and the Dept of Education refuses to accept it. (I contacted the treasuary dept also a couple of years ago and they can not find any record of this loan nor can SallieMae. I have kept an accurate record and knlow what loans I had taken. All loans are consolidated. I am telling you this because I think our own government is so messed up and so crooced by now that we do not receive equal, honest or fair help in anything. My career was taken from me, with huge debt and no way to pay it back by people who probably have a two year degree at most. How is it right to do this to people? I have since found out this “Ploy”has been done to many ,many other people with student loans also.

  5. Carolyn, I think that situations like yours are why the current rules limiting discharge of student loans may be too hard line.   If you were to file a bankruptcy, you would face an uphill battle convincing a judge to allow full or partial discharge of your student loans.

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