You Can File Bankruptcy on Student Loans — Here's How

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Stanley Tate

#1 Student Loan Lawyer

Updated on December 18, 2022

You can discharge student loans in bankruptcy, but it’ll take more work, cost you extra, and force you to pass a test that defeats most people — especially those with federal loans.

Around 250 thousand student loan borrowers file bankruptcy each year, but fewer than 300 walk away from their education debt in the proceeding, according to research published in the Duke Law Journal in December 2020. That’s a success rate of less than one-tenth of one percent.

So when you ask, “Can student loans be discharged in bankruptcy?” The answer is yes, but most people don’t bother because they don’t know it’s an option or because their lawyer tells them it can’t be done.

Keep reading to learn how to use bankruptcy to clear your student loan debt.

Key takeaways

  • You can file Chapter 7 or Chapter 13 bankruptcy if you have student loan debt, but to get a discharge, you must take an extra step: file an adversary proceeding.

  • The discharge order you get at the end of your bankruptcy case wipes out credit card debt, medical bills, personal loans, and other unsecured debts, but it doesn’t get rid of child support, alimony, most tax debt, and student loans.

  • Before rushing to bankruptcy court, exhaust your repayment options, including pausing monthly payments temporarily with a deferment or forbearance, enrolling in an income-driven repayment plan, and exploring student loan forgiveness programs.

  • Borrowers with Ed-owned student loans can now more easily get a bankruptcy discharge of their debt, thanks to a change in policy on undue hardship cases.

Note: I’ve helped several clients use the bankruptcy process to get a student loan discharge or, at a minimum, lower the amount they owe. Book a call with me to get my advice about your situation. You can also read the articles and content on this site to better understand if bankruptcy is the best choice for you.

How student loan bankruptcy works

There’s no special type of bankruptcy filing for student loans. Instead, student loan bankruptcy refers to filing a bankruptcy case — a Chapter 7 or Chapter 13 — and then filing a lawsuit, known as an adversary proceeding. In the AP, you’ll file a Complaint to Determine the Dischargeability of Student Loan Debt and provide supporting evidence. The bankruptcy judge will review it along with any information it got from the lender and decide whether to discharge your loans.

Few bankruptcy filers go through this process. And those that do aren’t guaranteed to walk away from their student loans. But if you’ve been making student loan payments for years or can no longer afford to pay your private loans, bankruptcy gives you a shot at fixing your financial situation for good.

Which type of bankruptcy to file

People can file two types of bankruptcy in the United States: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy is often called “liquidation” bankruptcy because you may have to liquidate some of your possessions to repay what you owe. Depending on where you live, however, some things like your home, car, clothes, and retirement savings may be protected.

Chapter 13 bankruptcy is also called “reorganization” bankruptcy. It lets you structure a repayment plan which details how you will pay back your mortgage, property taxes, credit cards, etc., over the next few years.

You can use either Chapter 7 or Chapter 13 to get rid of your student loans, but Chapter 7 is often the better option because it’s cheaper and faster. With Chapter 13, you have to repay banks, lenders, utility bills, etc., over several years. But with Chapter 7, you just add up your assets, file the bankruptcy petition, meet with the trustee, and a few months later, the court will sign a discharge order that gets rid of most of your unsecured debt. Keep in mind that you’ll still owe certain taxes, child support, alimony, and student loans.

Nearly everyone prefers Chapter 7 bankruptcy because it’s cheaper and quicker than Chapter 13. But not everyone can go that route. Your monthly income must be less than the state median for your household size to qualify. If it’s more, you must pass the “means test.” This test looks at all the money that comes into your home and your expenses.

No matter which type of bankruptcy you choose, you’ll be able to file an adversary proceeding to discharge your student loans soon after.

Chapter 7 vs Chapter 13 bankruptcy

Chapter 7 bankruptcy

Chapter 13 bankruptcy

Main features

Some property will be sold to repay the debts you owe.

You'll keep all of your property, but you'll have to make payments for a few years.

What property do you keep?

Some personal items and possibly your home and car, depending on where you live.

Generally, all of your property. Plus, you can save your home from foreclosure and stop evictions.

Who qualifies?

Your income must be below the median income for your state or pass a means test.

You must earn a regular income and fall below the unsecured debt limits.

How long does the process take?

About three to six months.

Three to five years.

How long does it stay on your credit report?

10 years.

7 years.

Filing for bankruptcy might decrease your credit score for a little while. But after two years, people say their credit scores are back up again. This lets them get a mortgage, an auto loan, and credit cards with good interest rates — even if the bankruptcy still shows on their credit history.

Can you file bankruptcy on student loans in collections?

Bankruptcy can be a powerful tool for dealing with student loans that have gone into collections due to default. It allows you to halt all collection activities, including wage garnishment and tax refund offset. You can also use the adversary proceeding process to try to resolve a student loan judgment entered against you.

My student loans were discharged in bankruptcy, right?

Chapter 7 bankruptcy doesn’t automatically discharge your student loan debt. Your discharge order at the end of your bankruptcy case wiped out your credit card debt, medical bills, personal loans, and other unsecured debts. You’ll need to file a separate action known as an adversary proceeding to get rid of your student loan debt. You’ll have to prove to the bankruptcy judge that repaying the debts would cause you and your dependents undue hardship.

Types of student loans eligible for bankruptcy

Federal student loans – You can declare bankruptcy on all federal student loans, including Direct Loans, FFEL Loans, Perkins Loans, and Parent PLUS Loans. Read more about Parent PLUS Loan bankruptcy.

Private student loans – You can get rid of all your education loans from private companies like Navient, Sallie Mae, SoFi, and others through the bankruptcy process. You might not even have to show that repayment would cause you and your dependents undue hardship. Read more about private student loan bankruptcy.

Student loans in collections – Bankruptcy can be filed on student loans that have defaulted and have been sent to a debt collection agency. It may be easier to meet the undue hardship standard because you likely won’t have access to an affordable payment plan. The lender will demand you pay the entire balance. Read more about filing bankruptcy on student loans in collections.

Student loans with judgments – If some sues you for a student loan, you can get rid of the judgment and the debt by filing bankruptcy. Read more about how to get rid of a student loan judgment.

Cosigned student loans – The primary borrower or cosigner can use bankruptcy to get rid of the loans if they have trouble paying the debt with available student loan repayment options. Read more about how bankruptcy affects student loan cosigners.

Related: Can You File Bankruptcy on Refinanced Student Loans?

Why you must file an adversary proceeding

Jerome H. Powell, the Federal Reserve chairman, has said that he’s “at a loss to explain” why student loans are treated differently than other types of debt in bankruptcy proceedings.

Before 1976, student loans were like other consumer debts and could be discharged through bankruptcy. But some legislators thought that people with expensive degrees who could make a lot of money might use this to their advantage, so they changed the rules.

After the changes, people had to wait five years after they had to start making payments before they could get rid of their loans in bankruptcy unless they could prove that the debt was causing them undue hardship.

Related: Why Can’t Student Loans Be Discharged in Bankruptcy?

Congress didn’t define “undue hardship” when it changed the Bankruptcy Code, so courts had to come up with a way to measure it. They did this by creating tests that look at things like a borrower’s income, expenses, and repayment history. Depending on where you live, your bankruptcy judge will use the Brunner Test or the totality-of-the-circumstances test — more on these below.

The multi-part tests

Most bankruptcy judges across the nation adopted the Brunner Test, named after the case that created it — Brunner v. New York State Higher Education Services.

The Brunner Test presents a high bar that few bankruptcy filers clear. You must prove three things to have your student loans discharged:

  • Based on your current income, you can’t maintain a minimal standard of living for yourself and your dependents while making your monthly payments.

  • Your financial situation is likely to persist throughout the repayment period.

  • You made a good-faith effort to repay the loans.

A handful of other courts use a more flexible standard, the totality of the circumstances test. Scholars and bankruptcy attorneys argue this test is easier to pass because it lets judges look at more facts and circumstances. But in practice, few people who come up against the test can overcome it and get a fresh start.

Many fail because they do a poor job showing the severity of their financial situation and their efforts to improve it. Others don’t win because the tests are too difficult to pass, no matter the effort.

President Joe Biden pledged to change that. On Nov. 17, 2022, he delivered.

Related: How to Prove Undue Hardship for Student Loans

Change to undue hardship policy

The Biden administration announced plans to make it easier for people to use bankruptcy to get rid of debt owed to the U.S. Department of Education. Effective right away, the new bankruptcy policy allows federal student loan borrowers to prove that they’re experiencing long-lasting financial hardship requiring a fresh start.

The announcement comes as the White House is battling to defend its sweeping student debt cancellation plan.

The guidance “outlines a better, fairer, more transparent process for student loan borrowers in bankruptcy,” Associate Attorney General Vanita Gupta said in a statement. Under the rules, people who owe money will fill out an “attestation form.” The form asks questions about the person’s age, income, expenses, and whether they have any disabilities that prevent them from working or if they have been unemployed for the past five years.

Related: Will Bankruptcy Stop Student Loan Wage Garnishment?

Attorneys from the Department of Justice will review the responses to identify cases where student loan debt is causing undue hardship. If some conditions are met — like if a debtor’s living expenses exceed their income — the attorney will recommend to the bankruptcy judge that they get a full or partial discharge of their federal loans. Read more about student loan bankruptcy reform.

This change isn’t permanent. A new administration could scrap the policy for its own. To fix things permanently, Congress would have to amend the existing bankruptcy law.

How to file student loan bankruptcy

Here are the three steps you need to take to file bankruptcy on student loans:

1. Find a lawyer. You don’t need to hire an attorney, but hiring the right one can help you get through the bankruptcy proceeding more quickly and efficiently. Finding the right attorney can be challenging. Most bankruptcy attorneys lack experience filing these types of cases. You may need to hire an attorney to handle your bankruptcy filing and then find a student loan bankruptcy lawyer to battle the undue hardship standard.

2. File a bankruptcy case. Before taking the next step to get rid of your student debt, you have to open a bankruptcy case. Chapter 7 is often the better option if you can pass the means test. The court will grant you a bankruptcy discharge in a few months. Otherwise, you could be stuck making payments in a Chapter 13 plan for years.

3. File an adversary proceeding. You’ll need to file a written complaint, called an adversary proceeding, with the court to ask the judge to erase your student loans. Your case will continue until you reach an agreement with the loan holder or the judge issues a decision. Read more about student loan adversary proceedings.

Potential outcomes

Here are the likely outcomes after filing a case to discharge student loans:

  • The court awards a full discharge if you prove you can’t maintain a minimal standard of living while repaying all of your student loan debt.

  • The court awards a partial discharge if the judge thinks you can pay some of your loans.

  • The court denies discharge if you fail to prove your financial hardship is undue.

  • You negotiate a settlement where the loan holder (i.e., the Department of Education or a private lender) agrees to let you pay less than you owe in a lump sum or over several years. Read more about settling student loan debt.

  • Your case is dismissed if you don’t follow the bankruptcy process (for example, not delivering the paperwork to the right bank, student loan servicer, lender, etc.).

Bankruptcy alternatives

If bankruptcy isn’t for you, here are five other options for student loan relief:

  • Refinance for a lower interest rate. Depending on your student loan balance, credit score, and income, you may be able to find a lender that offers better rates and terms to refinance your private loans. Read more about how to refinance a student loan with bad credit.

  • Consolidate for a single monthly payment. You can combine federal student loans into a new Direct Consolidation Loan for free by submitting an application to your loan servicer or on the Federal Student Aid website. The new loan will qualify you for payment plans that will lower your monthly bill and put you on the path toward loan forgiveness. Read more about student loan consolidation.

  • Request a deferment or forbearance. If you’re experiencing a temporary hardship, ask your servicer for repayment options that let you lower your payments or pause them for a few months with a deferment or forbearance. Read more about who to contact if you have questions about repayment plans.

  • Apply for an income-driven repayment plan. The Department of Education lets you make student loan payments based on your income and family size for 20 to 25 years. After your final payment, it writes off the remaining balance. Read more about income-driven repayment plan forgiveness.

  • Check your eligibility for forgiveness programs. Not only does the department offer student loan forgiveness after 20 years, but it also has other programs that will erase your debt if you work in public service or suffer from a permanent mental or physical disability. Read more about how to apply for student loan forgiveness.

Will student loans ever be dischargeable in bankruptcy?

Student loans are already dischargeable in bankruptcy, but the Education Department and a few lawmakers from both parties are trying to simplify the process. For example, last fall, Senator Dick Durbin, Democrat of Illinois, and Senator John Conyer, Republican of Texas, introduced a bipartisan bill into the Senate that would let borrowers discharge their student loan debt through bankruptcy.

The Fresh Start Through Bankruptcy Act would amend the Bankruptcy Code to let federal student loans be discharged after ten years of repayment without requiring proof of undue hardship. The waiting period, which prevents borrowers from racing to bankruptcy court to cancel their loans shortly after leaving school, harkens back to how student loan debt was treated before the law was changed in 1998.

This change would be great if it became law. But I doubt it will, at least not in its current form. There’s been no movement on the bill since being introduced over a year ago.

Bottom Line

Clearing student debt in bankruptcy is complex, and there’s a lot at stake. If poorly navigated, you may end up with even more student loan debt than when you began, as well as a ding on your credit report that can last up to 10 years. It makes sense to hire a lawyer who has successfully assisted others in obtaining a discharge.

Since 2014, I’ve helped a number of people across the United States navigate the bankruptcy process to shed the debt that their lawyers said was nondischargeable.

Schedule a call with me today. We’ll work together to determine the best strategy to deal with your student loans inside and outside bankruptcy.

UP NEXT: How to Apply for Student Loan Forgiveness

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