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

Can you file bankruptcy on student loans? Maybe a friend, a family member, or even a bankruptcy attorney you once spoke with answered this question for you. They said it couldn’t be done, that you had to be on the brink of death to qualify. ‘Don’t even try,’ they advised, ‘It’s a waste of time.’

But what if they were wrong?

Here’s the deal: bankruptcy can discharge student loans.

Over the past decade, I’ve helped borrowers use both Chapter 7 and Chapter 13 bankruptcy laws to get rid of some or all of their federal and private student loans.

Ahead, I’ll share with you how you could do the same and alternatives if this type of debt relief isn’t right for your situation.

You may also like:

• Why Can’t You File Bankruptcy on Student Loans?

• Can You File Bankruptcy on Private Student Loans?

• Can You File Bankruptcy on Parent PLUS Loans?

• Student Loan Cosigner & Bankruptcy: How it Works

Bankruptcy might seem like you’re saying you’ve failed somehow, but really it may be the smartest decision you can make to tackle your student debt. When refinancing isn’t an option, and your lender refuses to lower your monthly payments or shave off any of the interest, filing a Chapter 7 or Chapter 13 bankruptcy can flip the tables and put you in a more powerful position.

It achieves this by offering you a clean slate, wiping out most of your consumer debts — credit card debt, medical bills, personal loans, and so on. But this is where the situation gets tricky.

Different Types of Student Loans and Their Treatments in Bankruptcy

Here’s where things get complicated: student loans behave differently in bankruptcy. These are not ordinary debts; they come with their own set of rules.

Here’s the reality: Yes, it’s possible to discharge both federal and private student loans through bankruptcy. But the burden is on you. You must convince the court that repaying these loans would result in ‘undue hardship.’ And to do that, you have to pass the Brunner Test—a high legal bar.

Another problem: discharging student loans is not automatic in bankruptcy.

It requires an extra step—an adversary proceeding, which is like a lawsuit within your bankruptcy case.

I’ll get into the nitty-gritty of this process later, but for now, I want you to remember this: The fees you paid your attorney to file for bankruptcy won’t cover this lawsuit. It’s a separate process with separate charges.

Now that we’ve established how student loans are treated differently in bankruptcy let’s explore the consequences and complications this could entail.

We’ll dive into details like the undue hardship standard and the Brunner Test in the upcoming sections. But for now, let’s understand what happens when you initiate bankruptcy proceedings with student loans.

The Impacts of Bankruptcy on Student Loans: An Overview

Once you file for bankruptcy, your student loans are covered by an automatic stay, an automatic injunction that stops actions by creditors to collect debts. This means no bills are due, the phone calls stop, and if you’re being sued? That also stops.

But only for you. If you have a cosigner, the lender or debt collector can keep coming after them unless you file Chapter 13 bankruptcy. More on that in a minute.

Sounds like a breather, right? Well, sort of. No bills are due for now, but your loans are like a ticking time bomb, still accruing interest.

And if you were banking on some loan forgiveness programs like Public Service Loan Forgiveness or an Income-Driven Repayment Plan, you’d hit pause on that progress too.

You can file one of two types of bankruptcy cases to discharge student loans: Chapter 7 or Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, is the most common type. Here are its key aspects:

• Type – Liquidation: Also known as liquidation bankruptcy, it involves selling off your nonexempt assets to repay your debts.

• Popularity: Most people file this type as it’s fast (typically over in about 3 months) and relatively inexpensive.

• Properties: You usually get to keep exempt properties like your house, car, 401k, etc. Nonexempt properties could be sold by the trustee.

• Process – Trustee: A trustee, appointed by the court, oversees your case. They liquidate nonexempt assets and distribute the proceeds to your creditors.

• Eligibility – Means Test: To file Chapter 7, you must meet specific criteria. These include not having had another Chapter 7 bankruptcy discharged in the past eight years, and either having a current monthly income below the state median income or passing a means test, a method used to evaluate your financial capacity.

• Exceptions: Certain debts, such as alimony, child support, and some tax debt, cannot be discharged in a Chapter 7 bankruptcy.

• Student Loan Discharge: After your case is complete, you can file for student loan discharge.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, also known as reorganization bankruptcy, is another option for those unable to pass the Chapter 7 means test. Here are its key aspects:

• Type – Reorganization: Also known as reorganization bankruptcy. Instead of selling assets to pay creditors, you’ll enter into a court-approved repayment plan.

• Ideal for: Those who can’t pass the Chapter 7 means test or don’t want to lose their home to foreclosure.

• Properties: Under Chapter 13, you generally keep your property, but you must repay your debts over time as part of the repayment plan.

• Repayment Plan: This involves creating a plan to use up to 100% of your disposable income to repay creditors within three to five years.

• Process – Trustee: A trustee appointed by the court oversees your case. They collect your monthly payments and distribute them to creditors as per the court-approved plan.

• Eligibility: To file for Chapter 13, you must have a reliable source of income, and your debt must be within certain limits.

• Exceptions: Just like in Chapter 7, certain debts, such as alimony, child support, and some tax debt, typically can’t be discharged in a Chapter 13 bankruptcy.

• Debt Payments: The bankruptcy court determines your new monthly debt payments, including your new student loan payment.

Discharging student loans in bankruptcy isn’t as simple as filing for bankruptcy. It involves passing specific multi-part tests, each one posing its own challenges. Before we dive into those, let’s understand why these tests are necessary.

Understanding the ‘Undue Hardship’ Requirement in Student Loan Discharge

By law, student loans are treated differently than other consumer debts in bankruptcy. They aren’t automatically discharged when you file for bankruptcy, unless paying back these loans would cause you ‘undue hardship.’ This standard isn’t clearly defined in the bankruptcy code, leading to different tests in different courts.

Criteria for ‘Undue Hardship’: A Detailed Look

The term ‘undue hardship’ isn’t explicitly defined in the Bankruptcy Code, and so it’s open to interpretation by the courts.

A court might agree that repaying your loans would be an ‘undue hardship’ if you can demonstrate that:

1. You can’t maintain a minimal standard of living for yourself and any dependents.

2. The hardship will continue throughout the loan’s repayment period.

3. You sincerely tried to repay your loans before filing for bankruptcy.

‘Minimal standard of living’ is a flexible term and could involve situations where:

• Your income has been below the federal poverty level (FPL) for several years without signs of improving.

• You’re on public assistance or dependent on a family member.

• You have a debilitating mental or physical illness or permanent injury.

Additional circumstances might include:

• Having a child with a serious illness requiring round-the-clock care.

• A decrease in household income due to divorce.

• Disability checks being your only source of income.

• Depending on public assistance to support your children.

In some cases, you may be supporting a spouse who was seriously and permanently injured in a car accident or developed a total disability.

In these scenarios, your situation is unlikely to improve in a way that would allow you to repay your debt. Moreover, your expenses, scrutinized by the bankruptcy court, should only include reasonably priced necessities, not luxuries or nonessential purchases.

Why a Lawsuit Is Necessary for Student Loan Discharge

Initially, student loans were discharged in bankruptcy just like other consumer debts. But concerns arose that high-earning professionals with expensive degrees could exploit the system.

Consequently, 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.’

Over time, the five-year window was eliminated. Now, all student loan borrowers must sue to discharge their education loans in bankruptcy. You can read more about why it’s so hard to file bankruptcy on student loans [here (link to the internal article)].”

The Brunner Test: An Explanation

The Brunner Test is the one most bankruptcy judges across the nation use, named after the case that created it — Brunner v. New York State Higher Education Services. It sets a high bar that few bankruptcy filers clear.

To have your student loans discharged using this test, you must prove three things:

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

• Financial situation: Your financial situation is likely to persist throughout the student loan repayment period.

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

The Totality of Circumstances Test: What It Means

Some courts use this more flexible standard. It allows judges to consider all relevant facts and circumstances of your financial situation. Despite being considered more lenient, few people can overcome this test and get a fresh start.

Many filers fail these tests because they cannot sufficiently demonstrate the severity of their financial situation and their efforts to improve it. Others don’t pass because the tests are inherently challenging, no matter the effort.

Here are the three steps you can take to use bankruptcy to discharge your student loans:

1. Find a Lawyer: You don’t need to hire an attorney, but doing so can help you navigate the bankruptcy proceeding more quickly and efficiently. You may need to hire an attorney for the initial bankruptcy filing and then a specialist student loan bankruptcy lawyer to address the ‘undue hardship’ standard and the potential impact of bankruptcy on your credit score and overall financial health.

2. File a Bankruptcy Case: Before you can 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, as it could grant you a bankruptcy discharge in a few months.

3. File an Adversary Proceeding: After your bankruptcy case is open, you’ll need to file a written complaint or an ‘adversary proceeding’ with the court. This is where you ask the judge to erase your student loans. The case continues until you reach an agreement with the loan holder or the judge issues a decision.

Filing bankruptcy for student loans might soon become less complicated. The Department of Justice, in collaboration with the Education Department and the Biden administration, announced new guidelines last year aimed at facilitating a more equitable and uniform process for individuals attempting to discharge their federal student loans through bankruptcy.

These guidelines provide clarity on which types of cases may lead to a discharge and propose a more transparent process for borrowers. This is a considerable change from past administrations, which adopted a more stringent stance on student loan discharges in bankruptcy.

The new guidelines necessitate that debtors fill out an “attestation form”. This form will be used by the government to decide whether to advocate for a discharge.

Justice Department lawyers will assess the responses to identify instances where student loan debt is causing undue hardship. If certain conditions are met – for instance, if a debtor’s living costs surpass their income – the lawyer will recommend to the bankruptcy judge that the debtor receive a full or partial discharge of their federal loans.

In sum, these modifications imply that the process of discharging student loans through bankruptcy might become more feasible and less stressful for those who are most in need. The real-world application of these new guidelines is yet to be seen, but they offer a glimmer of hope for those grappling with student loan debt and seeking a route to financial relief.

Private student loans and bankruptcy are a tough nut to crack. They’re not like federal loans and come with their own bag of tricks. Here’s something you may not know:

Some loans you think are “private student loans” might not need to jump through so many hoops.

For instance, loans larger than your cost of attendance, loans for studying at non-Title IV institutions, bar exam fees and living expenses, medical residency expenses, or part-time study. These can be discharged just like your average unsecured debts. Two years ago, a federal appeals court in New York confirmed this in July 2021 when the judge agreed that private loans aren’t bulletproof in bankruptcy.

And earlier this year, a prominent private student loan lender, Navient, agreed that it would no longer collect loans that debtors had previously included in their bankruptcy cases.

If bankruptcy doesn’t seem like the right choice for you, there 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 might be able to secure better rates and terms from a lender willing to refinance your private loans.

2. Consolidate for a single monthly payment: By consolidating your federal student loans into a new Direct Consolidation Loan, you can streamline your payments into a single monthly amount. To do this, submit an application to your loan servicer or via the Federal Student Aid website. The new loan will qualify you for payment plans that can lower your monthly bill and pave the way toward loan forgiveness. Learn more about student loan consolidation.

3. Request a deferment or forbearance: If you’re undergoing a temporary hardship, inquire about repayment options from your servicer that allow you to reduce your payments or pause them for a few months with a deferment or forbearance.

4. Apply for an income-driven repayment plan: The Department of Education offers student loan payments based on your income and family size for a period of 20 to 25 years. After your final payment, the remaining balance is written off.

5. Check your eligibility for forgiveness programs: The department not only provides student loan forgiveness after 20 years but also has other programs that wipe out your debt if you work in public service or suffer from a permanent mental or physical disability.

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

1. Full discharge: The court may award a full discharge if you can demonstrate that repaying all of your student loan debt prevents you from maintaining a minimal standard of living.

2. Partial discharge: If the judge determines that you are able to repay some of your loans, they may award a partial discharge.

3. Discharge denied: If you fail to prove that your financial hardship is undue, the court may deny the discharge.

4. Settlement negotiation: You may be able to negotiate a settlement in which the loan holder (for example, the Department of Education or a private lender) agrees to accept a lesser amount than what you owe, paid either in a lump sum or over several years. Learn more about settling student loan debt.

5. Case dismissal: If you do not adhere to the bankruptcy process (such as failing to deliver the necessary paperwork to the correct bank, student loan servicer, lender, etc.), your case may be dismissed.

Take, for instance, a veteran from Texas who was drowning in over $100 thousand of private student loans. By using the bankruptcy process, I helped him discharge that debt.

I also came to the rescue of a Chicago-based mechanic who managed to get a bankruptcy discharge for a $40 thousand loan taken out for trade school.

But wait, there’s one case that I’m especially proud of — an outcome that’s almost too good to believe. It involves a high school math teacher from St. Louis.

This single mother of two college-aged kids was wrestling with private student loans she took out to fund her master’s degree — a risk she took, betting on a brighter financial future for her family. But every loan was a ticking time bomb, with their variable interest rates spiraling to a staggering 16%.

Despite her valiant efforts, the balance of her student loans ballooned to over $800 thousand, which included $367 thousand she owed the U.S. Department of Education.

Our paths crossed five years after she’d filed bankruptcy with another attorney who swore to her that student loans couldn’t be included in her bankruptcy case. A mere six months after we met, I used the student loan bankruptcy process to strike a deal with the lender.

And the terms?

The lender agreed to slash her $430 thousand debt down to a much more manageable $90 thousand.

But what about the loans she owed to the U.S. Department of Education?

Well, I managed to get rid of those too. Last year, we got the entire the mortgage-sized loan balance forgiven tax-free due to her time working full-time for government and nonprofit employers.

Here’s a snapshot of a note she sent me:

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.