Can You File Bankruptcy on Student Loans? Yes, Here's How

You can file for bankruptcy on your student loans, but it’s not an easy or guaranteed solution to resolving your student loan debt.

Many bankruptcy lawyers will tell you the opposite. That student can’t be discharged in bankruptcy. But that’s not true. You can bankrupt student loans — including those that have defaulted and have been sent to a debt collection agency.

To clear your student loans in bankruptcy, you must follow a complex legal process called an “adversary proceeding” and show to the bankruptcy court that repaying your student loans would cause undue hardship to you, your family, and your dependents.

Keep reading to learn more about declaring bankruptcy with student loans and, more importantly, when it makes sense to do so.

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 understand better if bankruptcy is the best choice for you.

You can file for bankruptcy on your student loans at any point, regardless of your current financial situation. You don’t need to be flat-broke, unemployed, or living in squalor. And you need not have missed a payment, defaulted, or had your loans sent to collections. In fact, you can even file for bankruptcy on your student loans if you’ve paid off other debts, and all that remains is your student loan debt.

But just because you can file bankruptcy on your student loans doesn’t mean that you’ll leave bankruptcy free from the burden of having to pay them back. To do that, you must do more work and start a process not included in the fee you paid to your bankruptcy attorney.

When you file for bankruptcy, you’ll have to list all your debts, including credit card debt, personal loans, medical bills, and other unsecured debts. At the end of your bankruptcy case, the judge will enter a discharge order that wipes out your obligation to pay back those debts. Unfortunately, that order doesn’t apply to your federal or private student loans.

Congress has set a higher standard for discharging student loan debt than other debts, making it more challenging to clear your student loans through bankruptcy.

To have your student loans discharged, you must file a separate legal action called an “adversary proceeding.” In this lawsuit, you’ll list the student loan debts you owe to the U.S. Department of Education and your private lenders. You’ll also explain to the bankruptcy judge why you cannot repay these debts and maintain a minimal standard of living without experiencing undue hardship.

Related: How to Prove Undue Hardship for Student Loans

In the past, student loans were discharged in bankruptcy just like other consumer debts. But lawmakers became concerned that high-earning professionals with expensive degrees could exploit the system. As a result, the rules were tightened. Borrowers had to wait at least five years from when they began making student loan payments to seek discharge unless they could prove that the debt created an “undue hardship.”

Related: When Did Student Loans Become Nondischargeable

The term “undue hardship” is not explicitly defined in the Bankruptcy Code. As a result, courts have created their own definitions, leading to inconsistent interpretations across different jurisdictions. Some judges can consider the “totality of the circumstances” when deciding, but most use a stricter interpretation called the Brunner test.

Over time, the five-year window was eliminated from the bankruptcy law that covers student loan discharges, 11 USC § 523(a)(8). Now all student loan borrowers must sue to discharge their education loans in bankruptcy.

Related: Can You File Bankruptcy on Private Student Loans?

There are two options to consider when discharging student loans through bankruptcy: Chapter 7 and Chapter 13 bankruptcy. While both require comprehensive financial disclosures about your income, expenses, assets, and debts, they differ in cost and speed. Regardless of which option you choose, you’ll need to file that paperwork before you file the adversary proceeding.

Chapter 7 bankruptcy, also called “liquidation” bankruptcy, involves selling some of your assets to pay off your debt. But depending on where you live, some items, such as your home, car, clothing, and retirement savings, may be protected.

Alternatively, Chapter 13 bankruptcy, or “reorganization” bankruptcy, lets you create a repayment plan outlining how you’ll pay off your mortgage, property taxes, credit cards, and other debts over several years.

Related: What Happens to Student Loans in Chapter 13

Most people prefer Chapter 7 bankruptcy because it’s quicker and less expensive, but it isn’t always an option for everyone. To qualify for Chapter 7, your monthly income must be below the state median for your household size, or you must pass the “means test,” which examines your household’s income and expenses.

Note: You may be able to skip the means test if you can show that you borrowed the student loans as nonconsumer debt.

Talk with a bankruptcy lawyer near you to determine which type of bankruptcy you should file.

• 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 someone 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?

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 test sets a high bar that few bankruptcy filers clear. To have your student loans discharged, you must prove three things:

• 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 few people who come up against the test can overcome it and get a fresh start.

Many fail because they need to do a better 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.

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

Related: How to Prove Undue Hardship for Student Loans

Discharging federal student loans in bankruptcy may get easier. Last year, the Department of Justice, in conjunction with the Education Department, unveiled new student loan bankruptcy guidelines to make sure individuals seeking relief on their federal student loans are treated more fairly and consistently.

These guidelines clarify what types of cases may result in a discharge and outline a more transparent process for borrowers. This is a significant shift from earlier administrations, which have been more rigid in their approach to discharging student loans in bankruptcy.

The new guidelines will require debtors to complete an “attestation form,” which the government will use to determine whether to recommend a discharge.

Attorneys from the Justice Department 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.

Overall, these changes suggest that the process of discharging student loans in bankruptcy may become more accessible and less burdensome for those who are most in need. It remains to be seen how these new guidelines will be implemented in practice, but they offer hope for those struggling with student loan debt and looking for a path to financial relief.

Related: Student Loan Bankruptcy Reform

Here are the three steps you can take to use bankruptcy to get a discharge of

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 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 must 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. Here’s a sample adversary proceeding student loans form.

Related: How Bankruptcy Affects Student Loan Cosigners

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.

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.).

Related: Will Filing Bankruptcy Affect Student Loans?

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

Since 2014, I’ve helped several 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.

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