Bankruptcy wipes away bills for credit cards and medical expenses with the stroke of a judge’s pen. But student loan debt doesn’t go away as easily. To get a discharge, you have to start a second bankruptcy process: a student loan adversary proceeding.
Student loan borrowers can use bankruptcy law to eliminate their higher education debt. But getting that type of relief isn’t automatic. It requires filing a lawsuit — called an adversary proceeding — after your bankruptcy case starts.
Ahead, learn what a student loan adversary proceeding is and how to file it to try and meet the undue hardship standard.
An adversary proceeding is a separate lawsuit within a bankruptcy case. Like any other lawsuit, it starts with a disagreement. A student loan adversary proceeding is a type of lawsuit usually filed by a borrower seeking to get rid of their debt because repaying it causes them an “undue hardship.”
The evidence needed to meet that standard is interpreted differently depending on where you live. Some jurisdictions have the judge review a “totality of the circumstances” for the borrower and decide. Others use a less flexible standard, the Brunner Test, that grants a discharge only if the judge answers “yes” to three questions:
Have you made a good-faith effort to repay the loans?
Are you unable to maintain a minimal standard of living while making the payments?
Is your financial situation likely to persist?
Regardless of which test is used, the bar to getting an undue hardship discharge is high but not impossible to overcome, especially for loans from private lenders. You can click here to learn how getting a private student loan bankruptcy discharge can be easier.
How to file an adversary proceeding for student loans
Follow these steps to file a student loan adversary proceeding:
Step 1 – File bankruptcy. You don’t have to fall behind on your payments or be in default or collections before you can file. And student loans can be your only debt. But before you can wipe out your loans, you have to file a bankruptcy case. Chapter 7 bankruptcy is preferred because it’s cheaper and faster. But depending on your situation, you may have to file a Chapter 13 bankruptcy, which takes up to five years and forces you to make payments to the bankruptcy court. Speak with a bankruptcy attorney near you to learn which one is right for you.
Step 2 – Draft a complaint. The complaint can be a simple, two-page document that identifies your student loan creditors and asks the judge to erase your debt because it causes you and your dependents an undue hardship. It can also span dozens of pages and show in great detail how financial and additional circumstances stand in the way of paying your private and federal student loans.
Step 3 – File the adversary. Filing the complaint opens an adversary proceeding and kicks off the battle between you and your student-loan creditors. The clerk will give you a summons and instructions to send it and a copy of the complaint to each creditor. You can also send a copy to the loan servicer. If you’re squaring off against the U.S. Department of Education, you’ll need to send a copy of the documents to the local United States Attorney.
Step 4 – Litigate the case. Lawyers for the creditors will respond to the lawsuit and argue the debts are non-dischargeable. They’ll ask to look at your tax returns, pay stubs, retirement accounts, bank statements, living expenses, etc. They’ll pore over your personal finances to find things you can cut to free up money to make your monthly payment. The Education Department will tell the court you can afford to make payments under one of its income-driven repayment plans. Private lenders may say you didn’t take advantage of deferments, forbearances, or offers to lower your interest rate. In the end, their goal is the same: to prevent a discharge of student loans. But that’s for the judge to decide.
Step 5 – Reach a resolution. There are three ways a case can end: settlement, dismissal, or a decision by the judge. A settlement is an agreement with the loan holder to wipe away a significant portion of your debt after you pay a reduced amount in a lump sum or over time. A dismissal can come from you, the creditor, or the judge to end the case early based on the merits of your case. Finally, if the case isn’t dismissed or settled, the judge will step in and decide what to do about your loans. Depending on where you live, the bankruptcy judge could grant you a full or partial discharge of your debt, or they can deny you a fresh start because you didn’t meet the undue hardship standard.
The federal bankruptcy code doesn’t have a form to shed student debt. It’s up to your bankruptcy lawyer or you, if you’re representing yourself, to stitch together the law and facts needed to put your student loan holders on notice that you’re seeking a discharge.
As I shared above, the complaint can be simple, like this two-page document filed by a lawyer in South Carolina. Or it can lay your hardship bare, like this 182-page lawsuit filed by a woman in California who convinced the judge to overlook her eligibility for income-based repayment and student loan forgiveness and discharge $350 thousand in federal student loans.
One is not better than the other. And a student loan bankruptcy lawyer isn’t necessary to win. What ultimately matters is whether there are enough facts to persuade the judge that you have an undue hardship that will persist throughout the repayment period. If there are, you’ll get the debt relief you need to move on with your life.