You can file bankruptcy on student loan debt. It's just hard to get a student loan discharge. Over the past few years, I've helped more than a handful of student loan borrowers get rid of all or some of their student debt in bankruptcy proceedings. In this guide, I go over tips to discharge student loans in bankruptcy.
Who is this guide for?
This guide is for any borrower struggling to repay their federal student loans or private student loans, or both. It's for you no matter what type of bankruptcy you eventually file. And it's for you if you've already filed bankruptcy, but are still struggling to keep up with your student loan payments.
Declaring bankruptcy on student loans
"I thought you couldn't file bankruptcy on student loans?" I hear this all the time — even from other bankruptcy lawyers. The truth is, you can file bankruptcy on student loans. But your regular bankruptcy case won't automatically get rid of your student debt. To get rid of your loans, you have to file a separate lawsuit after you file a chapter 7 or chapter 13.
- Why can't you declare bankruptcy on student loans?
- What is the likely impact of filing bankruptcy on a student loan?
History of student loan bankruptcy law
Until the late 1970's, you could file bankruptcy and get complete debt relief. Your bankruptcy discharge would wipe out your credit card debt, medical bills, and any student loans you had.
That complete relief ended when Congress changed the bankruptcy laws to make federal loans nondischargeable in bankruptcy absent undue hardship.
Thirty years later, Congress changed the Bankruptcy Code again to make some private loans nondischargeable absent undue hardship.
Now, you can discharge your student loan debt only if you can show that paying back your loans will cause you or your dependents an undue hardship.
- When did student loans become nondischargeable in bankruptcy?
- History of changes to student loan bankruptcy law
Chapter 7 bankruptcy considerations
When you file a chapter 7, your student loans will go into a deferment/forbearance and any garnishment you had for student loans will stop.
Once your case is over and you get a discharge, your student loans will typically pick up where you left off. So if you were in an income-driven repayment plan, you’ll start making payments again. If you were in default, you’ll go back to being in default. And if you were being garnished, your garnishment will start back.
- What happens to student loan debt in a chapter 7 bankruptcy
- Will bankruptcy stop student loan wage garnishment?
- Trying to find a student loan bankruptcy attorney?
Chapter 13 bankruptcy considerations
A chapter 13 case takes 3 to 5 years to complete. During that time, you'll make monthly payments to repay your debts. In most cases, almost none of that money will go to your student loans. As a result, many debtors leave chapter 13 with a much higher loan balance than they had before they filed.
And if that weren't bad enough, since no payments were being made to their loans, they also missed out on earning credit towards loan forgiveness offered by the Department of Education.
To avoid this, ask your lawyer to create your repayment plan so that payments are made to your student loan servicer.
Click here to learn What happens to student loans in chapter 13 bankruptcy.
How to file an adversary proceeding
You have to do two things to file bankruptcy on student loans.
First, you have to file for bankruptcy. It doesn’t matter what type of bankruptcy you file. A chapter 7 or chapter 13 bankruptcy both work.
Second, you have to file a lawsuit asking the court to grant you a student loan discharge.
No matter what test is used (Brunner Test or the totality-of-the-circumstances test) the basic question the bankruptcy court will ask is the same:
Can you maintain a minimal standard of living for yourself and your dependents while making your student loan payments?
- How to file an adversary proceeding for student loans?
- Sample adversary complaint to discharge student loans in bankruptcy
Undue hardship and student loan debt
There is no one definition of undue hardship. Courts use different tests to evaluate whether a borrower has an undue hardship. The two most common tests are:
- The Totality of the Circumstances Test
- The Brunner Test
The totality of the circumstances test looks at:
- your past, present, and reasonably reliable future financial resources;
- your reasonable and necessary living expenses; and.
- other relevant facts and additional circumstances.
Meanwhile, the Brunner test looks at 3 things:
- Can you pay your student loans and maintain a minimal standard of living with your current income?
- Is your financial situation likely to stay the same for a significant portion of the repayment period?
- Have you made a good faith effort to repay your student loans?
Which test your bankruptcy judge will use depends on where you live.
Click here to read How to Prove Undue Hardship Under the Brunner Test
Private student loan considerations
In my experience, private loans are often easier to get rid of in bankruptcy than are federal loans.
The reason for this difference comes down to repayment options. The Department of Education offers income-driven repayment plans. It's hard to meet the hardship standard when your monthly payment is $0.
Private loan holders don't offer those types of plans. The best they'll usually do is give you an interest rate reduction student loan repayment.
Click here to read How to Discharge Private Student Loans in Bankruptcy.