Bankruptcy Can Erase Student Loans — Here’s How

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Stanley Tate

#1 Student Loan Lawyer

Updated on November 20, 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.

Contrary to what you’ve heard, you can file bankruptcy on student loans. 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. But you can do it — even if you filed long ago.

To file bankruptcy on your student loans,* you have to start by doing these three things:

  • Head to bankruptcy court

  • File a lawsuit against your lender

  • Prove you can’t keep up with your living expenses while paying back your loans.

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

* The Education Department recently partnered with the Justice Department to develop new student loan bankruptcy guidelines for reviewing undue hardship cases for the federal student loans it owns.

Dive Deeper:

How to include student loans in bankruptcy

To include your student loans in bankruptcy, you’ll have to first file bankruptcy and list your student loan debt on your bankruptcy paperwork. Keep in mind that you can file either case even if your only debt is student loans and you’re current on your bills.

Most borrowers will move forward with one of two types of bankruptcy: Chapter 7 or Chapter 13.

Nearly everyone prefers Chapter 7 bankruptcy because it’s cheaper and quicker than Chapter 13, which requires you to set up a repayment plan to repay your creditors for several years. But you’ll need to pass a means test in order to go the quicker, faster route. If you fail, you’ll need to file for Chapter 13 bankruptcy.

Related: What Happens to Student Loans in Chapter 7?

After you decide what type of bankruptcy you’ll file, you’ll list all your assets and debts on your paperwork. At the end of your case, the bankruptcy court will enter an order that erases your credit card debt, medical bills, personal loans, and a few other types of debts.

But that order won’t write off your student loans.

To get rid of those, you’ll need to file a student loan bankruptcy case, i.e., a lawsuit, known as an adversary proceeding.

Related: What is an Adversary Proceeding?

My student loans were discharged in Chapter 7, right?

At the end of your chapter 7 bankruptcy, you should have received a court order. Although your unsecured debts like credit card, medical, and utility bills were wiped out at this point, this court order didn’t erase any student loans.

Why is that?

Federal student loans and many private loans are considered nondischargeable debts, meaning they aren’t automatically discharged (erased). Getting rid of them takes an additional step — you must file a lawsuit known as an adversary proceeding.

Most people don’t file this lawsuit because they didn’t know it was necessary to include their student loans in their discharge.

To be fair, it’s typically not a service included in the fee you paid your bankruptcy lawyer. Filing an adversary is a separate process — and a separate cost.

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.

Bankruptcy for student loan debt: How it works

You can file bankruptcy on federal and private student loan debt.* But the hurdles are high, and discharges are rare.

When the bankruptcy laws were first created years ago, you could file for bankruptcy and get rid of your student loan debt along with your credit card debt, medical bills, and other consumer debts. But starting in the 1970s, lawmakers slowly began tweaking the Bankruptcy Code to make education loans harder to discharge.

Related: Why Can’t You File Bankruptcy on Student Loans?

Congress didn’t do borrowers any favors when it drafted those laws. It tightened the rules so that only those bankruptcy filers who could show that having to repay their student debt would cause them and their dependents “undue hardship” would be eligible for debt relief.

Unfortunately, Congress didn’t define what undue hardship meant, leaving that task to judges — who also passed on giving it a definition. Instead, the courts created multi-part tests that look at a borrower’s past, present, and future income, living expenses, and repayment history, including requests for deferments, forbearances, and income-driven repayment plans.

Depending on where you live, your bankruptcy judge will use the Brunner Test or the totality-of-the-circumstances test — more on these below.

Learn More: How to Prove Undue Hardship for Student Loans

* It’s often easier to discharge private student loans because many of them — particularly those made before 2010 — arguably aren’t subject to the undue hardship standard. Read more about private student loan bankruptcy.

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 have to 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 that this test is easier to pass because it allows judges to look at additional 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 demonstrating 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 Biden pledged to change that. On Nov. 17, 2022, he delivered.

New bankruptcy discharge guidance for federal student loans

The Education Department and the Justice Department worked together to develop a new process for handling undue hardship cases involving Ed-held federal student loans. This new process will involve borrowers filling out an attestation form that reveals their monthly income and expenses, age, employment history, whether they earned a degree, and so on.

The Department of Justice will work with the Department of Education to review the information you provide. They will look at factors that courts consider when deciding if someone can be relieved from their student loan debt. If they believe you meet the requirements, they will recommend that the bankruptcy judge discharge your student loan debt.

No matter what they say, the decision to discharge your student loans will be made by a judge.

Is it worth moving to a jurisdiction that uses one test or the other? IMO, not really. If you were forum shopping, i.e., looking to file your case in the place that gives you the greatest chance at success — the better move is to review student loan bankruptcy cases and see which judges are more likely to approve student loan discharges.

Related: Can You File Bankruptcy on Refinanced Student Loans?

How to file bankruptcy on student loans

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 bankruptcy proceedings more quickly and efficiently. Finding the right attorney can be challenging. Most bankruptcy attorneys have never filed a student loan adversary proceeding. You may need to hire an attorney to handle your bankruptcy filing and then 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. Related: What Happens to Student Loans in Chapter 13 Bankruptcy?

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 decides what happens. Read more about student loan adversary proceedings.

Related: Can You File Bankruptcy on Private Student Loans?

Potential outcomes

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

  1. 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.

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

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

  4. 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.

  5. Your case is dismissed if you don’t follow the bankruptcy process (e.g., not delivering the paperwork to the right company).

Alternatives to filing bankruptcy on student loans

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

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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 become permanently disabled. 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 working 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 allow borrowers to discharge their student loan debt through bankruptcy.

The Fresh Start Through Bankruptcy Act would amend the Bankruptcy Code to allow federal student loans to be discharged after ten years of repayment without requiring proof of undue hardship. The waiting period, which is meant to prevent 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.

Want to file bankruptcy to discharge student loans?

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 student loan borrowers across the United States navigate the bankruptcy process to shed the debt that their lawyer 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 of bankruptcy.

UP NEXT: Can Parent PLUS Loans Be Discharged?

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