Over the past five years, I've filed tens of adversary proceedings to discharge student loans in bankruptcy. I even wrote a guide to the student loan bankruptcy process.
Almost always, I've been able to either discharge my clients' student loan debt in full, get a partial discharge, or negotiate a settlement for a significantly reduced amount.
I've done this for both federal and private loans. But I've done it far more frequently for private loans because, as I explain below, private loans are easier to get a favorable result than are federal student loans.
In this post, I'll share some things you need to know to try to discharge your federal student loans in bankruptcy.
Why you can't automatically discharge federal student loans in bankruptcy
In creating the Bankruptcy Code, Congress passed laws that made it so federal student loans weren't automatically discharged in a bankruptcy case. The reason why they passed those laws was to prevent people from getting a degree and then immediately filing bankruptcy to get rid of the student loan debt they racked up.
Whether that concern was legitimate or not is debatable.
But what's not debatable is that since Congress first decided to treat federal student loans differently than credit card debt and other unsecured debt, getting a federal student loan bankruptcy discharge has become really difficult.
In fact, when people ask me my opinion about their chances for success, I rarely say it's greater than 10%.
How to prove undue hardship to discharge federal student loans
There's no one way to prove undue hardship. The Bankruptcy Code doesn't define it. And over the years, what's been undue hardship to one bankruptcy judge, has been ordinary hardship to another.
Despite the inconsistency in determining the type of hardship, the tests used to analyze student loan undue hardship are the same.
Most bankruptcy courts are going to use either the Brunner Test of the totality of circumstances test.
Let's talk about each.
The Brunner Test
The Brunner Test comes from a 1980's bankruptcy case, Brunner v. New York State Higher Education Services Corp.
In that case, the judge formulated a three-pronged test that asked:
- Based on current income, can the debtor maintain a minimal standard of living for her and her dependents while repaying her student loan debt?
- Is the debtor's financial situation likely to stay the same for a significant portion of the repayment period of the student loans?
- Has the debtor made a good faith effort to repay her student loan debt?
To prove undue hardship, the debtor must pass each prong.
That means if you want to discharge your student loan, you must prove:
- your current income doesn't let you maintain a minimal standard of living for you and your dependents while repaying your federal loans;
- your financial situation is likely to stay the same for a significant portion of the repayment period for your federal loans; and
- you made a good faith effort to repay your federal loans (applied for loan consolidation, made student loan payments, requested deferments and forbearances, etc.).
The totality of circumstances test
While not as popular as the Brunner Test, plenty of courts use the totality of circumstances test to determine undue hardship.
In fact, it's the one I encounter the most, because it's the test used by bankruptcy judges here in St Louis Missouri.
The totality of circumstances test asks basically the same questions as the Brunner Test, but it goes further. It asks more questions. Plus, failing any one of the questions, doesn't mean you can't get a student loan discharge. It just means you failed that particular question.
Under the totality of circumstances test, the bankruptcy judge reviews:
- your past, present, and reasonably reliable future financial resources;
- your reasonable and necessary living expenses; and
- any other relevant facts and circumstances.
Other relevant facts and circumstances include:
- total present and future incapacity to pay debts for reasons not within your control;
- whether you've made a good faith effort to negotiate a deferment or forbearance of payment;
- whether the hardship will be long-term;
- whether the you've made payments on the student loan;
- whether you have a permanent disability;
- your ability to obtain gainful employment in your area of study;
- whether you've made a good faith effort to maximize income and minimize expenses;
- whether the dominant purpose of your bankruptcy filing was to discharge the student loan; and
- the ratio of student loan debt to total debt.
Why federal student loans are difficult to discharge
Federal student loans are more difficult to discharge in bankruptcy than are private student loans for two reasons.
First, the Department of Education offers income-based repayment plans. Under those repayment plans, borrowers can have a monthly payment as low as $0. It's hard to say your student loans are causing you an undue hardship when your monthly payment is $0 or some other affordable amount.
Private student loans don't offer repayment plans based on income. Typically, the best they'll do is give you a forbearance, or let you make interest-only payments for a short period of time. After that period ends, your private loans will go back to demanding a monthly payment you can't afford for a student loan debt you have no shot at paying off.
Second, bankruptcy laws leave no wiggle room to discharge federal student loans: you have to prove undue hardship.
Section 523(a)(8)(A) says that any student loan made by the government or under a loan program funded by the government or a nonprofit is nondischargeable.
So if you have a student loan made under the Direct Loan Program, the Federal Family Education Loan program, or the Perkins Loan program that student loan is nondischargeable.
Private student loans are different.
Under Section 523(a)(8)(B), a private student loan is nondischargeable in bankruptcy only if it is a qualified education loan. Not every private student loan meets the strict requirements to be a qualified education loan.
For a student loan to be a qualified education loan, a student loan borrower had to be a taxpayer and borrow the student loan at a school that received federal student aid. Also, the student loan must not have exceeded the borrower's cost of attendance.
These specific requirements leave room for a student loan bankruptcy attorney to argue your private student loan debt isn't a student loan under bankruptcy law. The same argument doesn't exist for federal student loan debt.
Click here to learn How to File an Adversary Proceeding for Student Loan Discharge.
When to file the adversary proceeding
There's no set time you have to file the adversary proceeding. But there is a general window in which you should file it. And that window changes depending on whether your filed a chapter 7 bankruptcy or chapter 13 bankruptcy.
If you filed a chapter 7, you can file the adversary proceeding while your case is open. You can also file it after your case closes.
How long after depends on the bankruptcy court you're filing in. Some courts let you file up to 5 years after your case closes. Others have reopened a debtor's case more than a decade later. Which court is right is unclear. Bankruptcy Rule 4007(b) says a debtor can file an AP to discharge student loans at ANY time.
If you've already filed a bankruptcy case and received a discharge, you may be able to reopen your case to try to discharge your student loans.
Reopening your case doesn't affect your discharge and it doesn't affect your credit score. It's simply a way for the bankruptcy court to connect the adversary proceeding to your bankruptcy case.
To reopen your case, you may need to file a motion to reopen to file a student loan discharge complaint.
If you filed a chapter 13, you likely want to file a proceeding near the end of your case. By then, your repayment plan will be almost over and the court will have been monitoring your finances for 3 to 5 years.
That time should give the court a clearer picture of your past financial situation and the likeliness your financial situation will persist for the remainder of your student loan repayment period.
Sample adversary proceeding to discharge federal student loans
Before I filed my first AP, I had no clue what to say or how to say it. I did a bunch of research and looked at hundreds of bankruptcy proceedings. What I learned is that there's no one way for the AP to look.
I've seen cases where the bankruptcy attorney wrote fewer than 10 sentences. I've seen others that stretched over 10 pages. In looking at the decisions, I learned that the length of an AP isn't an indicator of whether you'll get a discharge.
What matters instead, is whether you provide enough information in your complaint to survive a motion to dismiss for failure to state a claim.
In an effort to do that, I try to include just enough information to show that my client has an argument she can pass the Brunner Test or totality of circumstances test.
What to do if you can't discharge student loans
Not being able to discharge a student loan isn't the end of the world - at least for federal student loans. You still have options.
You can apply for an income-based repayment plan. You can request a deferment when you can't afford your monthly payment. If you work for the government or a nonprofit, you can get loan forgiveness under the Public Service Loan Forgiveness program.
Of course, your student loan debt will continue to grow over the years. And that's stressful. But I've helped plenty of student loan borrowers not let their student debt stop them from getting married, buying a home, and living the life they desired.