"I thought you couldn't file bankruptcy on student loans?" I hear this all the time — even from other bankruptcy lawyers.
Bankruptcy clears student loans.
Let me say that again.
Student loans can be discharged in bankruptcy.
And you can do so without hiring a bankruptcy attorney (even though I think you should). That said, it's hard to get a student loan discharge without help from someone that knows what they're doing.
To get a full or partial discharge of your federal student loans or private student loans, you typically have to prove one thing to the bankruptcy court:
repayment of your student loans is causing both you and your dependents an undue hardship.
Before you can offer that proof, you have to start the bankruptcy proceedings.
You start those proceedings by filing either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.
More on that below.
History of student loan bankruptcy law
Until the late 1970s, 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 U.S. 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
Sen. Chuck Schumer has been pressuring Pres. Joe Biden to cancel student loan debt through executive action. In addition, Sen. Elizabeth Warren is expected to reintroduce a consumer bankruptcy reform bill that would allow student loan debt to be freely dischargeable. Will either of these actions lead to the mass cancellation of student loan debt? I'm not sure.
Can I include student loans in chapter 7 bankruptcy?
When you file a chapter 7, your student debt will go into a deferment/forbearance, and any student loan wage garnishment will stop.
Once your case is over and you get a discharge, your student loans will typically pick up where you left off before your bankruptcy filing.
So if you were in an income-driven repayment plan, you'd start making payments again. If you were in default, you'd go back to being in default. And if you were being garnished, your garnishment will start back.
Click here to learn What Happens to Student Loans in Chapter 7
Chapter 13 bankruptcy and student loans
It takes about 3 to 5 years to complete your chapter 13 plan. 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 debt. As a result, many debtors end up with a much higher loan balance than after filing bankruptcy.
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 to make payments to your student loan servicer.
Click here to learn What Happens to Student Loans in Chapter 13 Bankruptcy
When to file student loan bankruptcy?
When do you try to get rid of your student loan debt?
The timing depends on the type of bankruptcy case you filed.
For chapter 7 bankruptcy cases, you'll typically start the process of getting rid of your student loans soon after you file bankruptcy.
For chapter 13 bankruptcy cases, you'll likely need to wait until your bankruptcy case is near the end. This means you may need to wait 3 to 5 years before you try to get rid of your student loans.
And if you've already filed bankruptcy and gotten a discharge, you may still be able to try to get rid of your loans through the b bankruptcy process.
How? By filing a motion to reopen your bankruptcy to discharge your student loans.
Click here to learn How to File an Adversary Proceeding for Student Loans?
Here's a video of a client whose bankruptcy case I had to reopen so she could discharge over $75 thousand in student loans:
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?
If the answer is yes, the bankruptcy judge will grant a discharge of student loan debt.
If the answer is no, then you'll need to look into other options to repay your loans.
- How to File an Adversary Proceeding for Student Loans?
- Sample Adversary Complaint to Discharge Student Loans in Bankruptcy
Undue hardship and student loan debt
Wondering "What is undue hardship for student loans?"
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 of the student loans?
- Have you made a good faith effort to repay your student loans?
Which test your bankruptcy judge uses depends on where you live.
- An Analysis of Brunner v. New York State Higher Education (NYSHES)
- 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 U.S. Department of Education offers income-driven repayment plans like the income-based repayment plan.
Plus, the Department of Education offers various student loan forgiveness programs.
It's hard for student loan borrowers to meet the undue hardship standard when your monthly payment is $0 and your loans can be forgiven.
Private loan holders don't offer those types of plans. The best private lenders will give you a lower interest rate.
They may even put you into an interest rate reduction student loan repayment plan.
But they don't offer loan forgiveness programs as the federal government does.
Click here to read How to Discharge Private Student Loans in Bankruptcy.
Credit score considerations
The bankruptcy will stay on your credit report for 10 years.
Don't let that scare you.
Most of my clients tell me that their credit scores and personal finances bounced back a year or two after filing bankruptcy.