Discharging Student Loans Through Bankruptcy: What You Need to Know

#1 Student loan lawyer

Updated on March 16, 2024

Overwhelming student loan debt can feel like a crushing weight on your shoulders, leaving you struggling to keep up with payments and wondering if you’ll ever break free from the cycle of debt. If you’re in this situation, you’re not alone. Millions of borrowers face the daily stress and anxiety of trying to manage student loans that feel insurmountable.

But there is hope.

While student loans are more difficult to discharge than other types of unsecured debt, filing for bankruptcy can offer a path to relief if you can prove that repayment would cause undue hardship.

As a lawyer who has helped countless individuals navigate this complex process, I’ve seen firsthand how bankruptcy can provide a way out from under the shadow of student loan debt and offer a fresh start.

In 2024 alone, our firm has filed successful student loan bankruptcy cases in Missouri, Illinois, and Texas, achieving outcomes such as:

  • Full discharge of federal and private student loan debt

  • Partial discharge of loan balances

  • Negotiated settlements that significantly reduced loan balances and lowered monthly payments by allowing clients to pay the remaining balance over several years at little to no interest

These results have given our clients the opportunity to move forward with their lives, free from the constant worry and stress of unmanageable student loan debt.

To successfully file for student loan bankruptcy, you’ll need to:

  1. File for Chapter 7 or Chapter 13 bankruptcy

  2. File an adversary proceeding (AP) to have your student loans considered for discharge

  3. Prove that repaying your loans would cause undue hardship

I know the thought of taking on the bankruptcy process can feel daunting, especially when you’re already struggling with the weight of your student loans. But you don’t have to face this challenge alone.

In this article, I’ll break down the legal framework surrounding student loans and bankruptcy, explain the circumstances under which you can file, and share the key factors courts consider when deciding whether to grant a discharge or other form of relief. By understanding your options and working with an experienced student loan bankruptcy attorney, you may be able to find a path to financial freedom and reclaim your peace of mind.

Don’t let student loan debt control your life any longer. Keep reading to learn more about how bankruptcy may be able to help you achieve the fresh start you deserve.

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Bankruptcy and Student Loans

Bankruptcy is a legal process designed to provide financial relief for individuals and businesses struggling with overwhelming debt. Through bankruptcy, debtors can seek a fresh start. This can involve:

  • Liquidating assets (selling off belongings) to repay creditors (those you owe money to, such as mortgage lenders, credit card companies, or auto loan providers).

  • Establishing a structured repayment plan under court supervision.

While bankruptcy can provide a clean slate for many types of debt, borrowers often find themselves still burdened by student loans after the process is complete. This is because student loan debt is treated differently within the U.S. bankruptcy system.

Chapter 7 vs. Chapter 13 bankruptcy

When considering bankruptcy, you’ll encounter two primary options: Chapter 7 and Chapter 13. Understanding the key differences between these chapters is crucial for making an informed decision, especially when it comes to student loan debt.

Chapter 7 Bankruptcy

Often referred to as “liquidation,” Chapter 7 involves selling off non-exempt assets (items you’re legally allowed to keep) to repay creditors a portion of what they’re owed. After the liquidation process, any remaining unsecured debt, such as credit card balances and medical bills, is typically discharged (wiped clean). However, student loans are generally not automatically discharged in Chapter 7.

To have your student loans considered for discharge in Chapter 7:

  • You’ll need to file a separate adversary proceeding

  • You must prove that repaying the loans would cause undue hardship

  • If you don’t file an adversary proceeding or if the court determines that you don’t meet the undue hardship standard, your student loans will remain your responsibility after the bankruptcy case is concluded

Chapter 13 Bankruptcy

This option focuses on creating a court-approved repayment plan that lasts 3-5 years. During this period, you’ll make monthly payments to a court-appointed trustee who distributes the funds to your creditors. The repayment plan may include your student loans, but they are typically treated as non-priority unsecured debt, meaning they are paid last after other obligations like priority debts and secured debts.

In a Chapter 13 bankruptcy:

  • You may be able to discharge some of your student loan debt if you can prove undue hardship through an adversary proceeding

  • Even if you can’t prove undue hardship, Chapter 13 can still provide some relief by allowing you to make reduced payments on your student loans during the repayment plan period

  • This can help you manage your debt and protect you from collection actions while you work to improve your financial situation

It’s important to note that in both Chapter 7 and Chapter 13, you must take the additional step of filing an adversary proceeding to have your student loans considered for discharge. Without this step, your student loans will generally survive the bankruptcy process and remain your responsibility.

Why Discharging Student Loans in Bankruptcy is Difficult

Unlike most other forms of consumer debt, student loans are exceptionally difficult to discharge in bankruptcy proceedings. This is due to two primary factors.

  • First, there’s a specific provision within the bankruptcy code that requires borrowers to prove “undue hardship” to qualify for discharge.

  • Second, federal policies prioritize maintaining the availability of student loans for future students. Policymakers fear that making it too easy to discharge student debt could discourage lenders or increase the cost of those loans.

The specific criteria for proving undue hardship are complex and have been the subject of much litigation. I’ve even contributed to that litigation. In helping a client discharge private student loan debt owed to National Collegiate Student Loan Trust, I had to argue that not all private student loans are protected from discharge by bankruptcy law. We won that case.

Dischargeability of Student Loans

There was a time when bankruptcy could eliminate your student loan debt without extra hurdles. But Congress changed the law, and now Section 523(a)(8) of the Bankruptcy Code requires proving “undue hardship” to the court.

Unfortunately, lawmakers haven’t provided a clear definition of “undue hardship” or specific factors to consider. As a result, bankruptcy judges have been left to interpret this term on a case-by-case basis.

Undue Hardship and Bankruptcy

To prove that repaying your student loans would cause “undue hardship,” most courts use the Brunner Test, which requires you to demonstrate three key factors:

1. Poverty

If you are required to repay your student loans, you would be unable to maintain a minimal standard of living for yourself and your dependents based on your current income and expenses. This means that after paying your student loans, you would not have enough money left over to cover basic necessities like food, housing, utilities, healthcare, and transportation.

2. Persistence

Your current financial situation is likely to persist for a significant portion of the student loan repayment period. This factor takes into account your age, health, education, work experience, and other circumstances that may affect your ability to earn enough income to repay your loans in the future. For example, if you have a serious medical condition that limits your ability to work, or if you have been unemployed for an extended period despite your best efforts to find a job, this may support a finding of undue hardship.

3. Good Faith

You have made a good faith effort to repay your student loans. This means that you have honestly tried to make payments when possible, even if you couldn’t pay the full amount due. Courts will look at whether you have explored alternative repayment options, such as income-driven repayment plans or deferment/forbearance, before seeking a bankruptcy discharge. They will also consider whether you have tried to maximize your income and minimize your expenses to free up more money for loan payments.

While the Brunner Test is the most common standard used by courts to evaluate undue hardship, some jurisdictions may use an alternative test known as the “Totality of the Circumstances” test.

The Totality of the Circumstances Test

In contrast to the Brunner Test, the “Totality of the Circumstances” test takes a more holistic approach to evaluating whether repaying your student loans would cause undue hardship. This test considers a broader range of factors related to your past, present, and future financial situation, including:

  1. Past, Present, and Future Financial Resources: The court will examine your financial history, current income and expenses, and potential future earning capacity. This may include factors such as your education, work experience, and job market prospects.

  2. Necessary and Reasonable Living Expenses: The court will assess whether your living expenses are necessary and reasonable based on your individual circumstances. This may include expenses related to housing, food, healthcare, transportation, and other essential needs.

  3. Duration of Financial Hardship: The court will consider how long you have been experiencing financial difficulties and whether your situation is likely to improve in the future.

  4. Good Faith Efforts to Repay: As with the Brunner Test, the court will evaluate your efforts to make student loan payments and explore alternative repayment options.

Under the “Totality of the Circumstances” test, courts have more flexibility to consider a wide range of factors that may contribute to your financial hardship. However, the burden of proof is still on you to provide compelling evidence that repaying your student loans would be an insurmountable obstacle to maintaining a minimal standard of living.

If you live in a jurisdiction that uses the “Totality of the Circumstances” test, your attorney can help you gather the necessary evidence and build a strong case for undue hardship based on your unique financial situation.

Filing an Adversary Proceeding for Student Loan Discharge

To have your student loans considered for discharge in bankruptcy, you must file a separate lawsuit within your bankruptcy case called an “adversary proceeding.” This process involves several steps:

  1. File for Chapter 7 or Chapter 13 bankruptcy: Before you can file an adversary proceeding, you must first file for bankruptcy under either Chapter 7 or Chapter 13. Your attorney can help you determine which type of bankruptcy is most appropriate for your financial situation.

  2. Initiate the adversary proceeding: Once your bankruptcy case is filed, you can initiate the adversary proceeding by filing a complaint with the bankruptcy court. The complaint must include:

  3. The basis for your claim of undue hardship (i.e., which test you are relying on – Brunner or Totality of the Circumstances): (a) A list of your student loans and the amounts owed; (b) The reasons why you believe you meet the criteria for undue hardship; and (c) A request for the court to discharge your student loans.

  4. Serve the complaint: After filing the complaint, you must serve a copy of it along with a summons on your student loan lenders, the U.S. Department of Education (if you have federal loans), and any other interested parties. These parties will have the opportunity to respond to your complaint and oppose your request for discharge.

  5. Attend the pretrial conference: The court will schedule a pretrial conference where you, your attorney, and the opposing parties will meet to discuss the case and explore the possibility of a settlement. If a settlement cannot be reached, the court will set a date for a trial.

  6. Prepare for trial: If your case goes to trial, you and your attorney will need to gather evidence to support your claim of undue hardship. This may include documentation of your income, expenses, employment history, health status, and other relevant factors. You may also need to testify in court about your financial circumstances and efforts to repay your loans.

  7. Attend the trial: At the trial, your attorney will present your case for undue hardship, and the opposing parties will have the opportunity to challenge your evidence and arguments. The judge will then decide whether to grant a full or partial discharge of your student loans based on the evidence presented.

Filing an adversary proceeding can be a complex and time-consuming process, but it may be the only way to obtain relief from burdensome student loan debt.

Related: How to File a Student Loan Adversary Proceeding

Gathering Evidence to Prove Undue Hardship

To successfully prove undue hardship in an adversary proceeding, you’ll need to provide compelling evidence that demonstrates your inability to maintain a minimal standard of living while repaying your student loans. This evidence should support the specific criteria of the undue hardship test used in your jurisdiction (Brunner or Totality of the Circumstances).

Some key types of evidence to gather include:

  • Income and expense records: Detailed documentation of your current income from all sources (e.g., employment, government benefits, alimony) and your necessary living expenses (e.g., housing, food, utilities, transportation, healthcare). This evidence can help show that your expenses consume all or most of your income, leaving insufficient funds to make student loan payments.

  • Employment history and job search efforts: Evidence of your employment history, including any periods of unemployment or underemployment, as well as documentation of your efforts to find better-paying work (e.g., job applications, resume submissions, interview records). This can help demonstrate that your financial hardship is likely to persist due to limited earning potential.

  • Medical documentation: If you have a disability or chronic health condition that limits your ability to work, medical records and doctor’s statements can provide strong evidence to support your undue hardship claim.

  • Educational background: Information about your educational background, including your degree(s), transcripts, and any additional training or certifications, can help the court assess your earning potential and the likelihood of your financial situation improving in the future.

  • Loan repayment history: Records of your student loan payments, including any periods of deferment, forbearance, or default, as well as evidence of your efforts to explore alternative repayment options (e.g., income-driven repayment plans, loan consolidation).

  • Correspondence with lenders: Copies of any correspondence you’ve had with your student loan lenders or servicers, including requests for loan modifications, settlement offers, or hardship accommodations, can demonstrate your good faith efforts to manage your loans before seeking discharge.

Key Student Loan Bankruptcy Cases

These cases have shaped how bankruptcy judges interpret “undue hardship”:

  1. Brunner v. New York State Higher Education Services Corp. (1987): This landmark case established the Brunner Test as the primary standard for determining undue hardship. The three-pronged test has become the most widely used method for evaluating whether a borrower qualifies for student loan discharge in bankruptcy.

  2. In re Roth (2012): This case clarified that a borrower’s situation does not need to be hopeless to qualify for discharge. The court recognized that factors such as age, health, and future earning potential should be considered when assessing undue hardship. This decision provided a more nuanced approach to the Brunner Test.

  3. Educational Credit Management Corporation v. Jesperson (2006): This case emphasized the importance of demonstrating good faith efforts to repay student loans. The court highlighted that borrowers must show they have tried to find employment, increase their income, and reduce spending, even if they cannot make payments on their student loans. This decision reinforced the significance of the good faith prong of the Brunner Test.

Discharging Federal Student Loans Is Getting Easier

The Biden administration has taken steps to make it easier for some borrowers to discharge their federal student loan debt through bankruptcy. In November 2022, the Justice and Education Departments introduced a new guidance that streamlines the process for proving undue hardship.

How the New Guidance Works

Under this guidance, borrowers seeking to discharge their federal student loans must follow these steps:

  1. File an adversary proceeding within their bankruptcy case

  2. Submit a completed Attestation form, which outlines their income, expenses, and circumstances contributing to their claim of undue hardship, along with supporting documents to the Department of Justice (DOJ) attorneys

  3. The Department of Education provides the borrower’s account history to the DOJ attorney and the borrower, which can be helpful in completing the Attestation

  4. After consulting with the Department of Education, the DOJ attorney will submit recommendations for discharge in appropriate cases

  5. If a discharge is agreed upon, the parties submit a stipulation for court approval of a full or partial hardship discharge

This new process has shown promise, with a few hundred borrowers successfully having some or all of their debts forgiven in bankruptcy. But it’s important to note that the new guidance does not guarantee a discharge of federal student loans. The DOJ attorneys will still review each case individually and make recommendations based on the borrower’s specific circumstances and the evidence provided in their Attestation form.

While the new guidance streamlines the process for demonstrating undue hardship, it does not change the underlying legal standard that borrowers must meet. The Brunner Test or the Totality of the Circumstances Test, depending on the jurisdiction, will still be used to evaluate whether a borrower qualifies for discharge.

Additionally, the impact of the new guidance may vary depending on the borrower’s location and the specific bankruptcy court handling their case. Some courts may be more receptive to the streamlined process, while others may still require more extensive legal proceedings.

You can get more information about this process on the Federal Student Aid website. And you can review this sample scenario to see the attestation form in action.

Private Student Loans and Bankruptcy

While the Biden administration has worked to make discharging federal student loans in bankruptcy easier, it hasn’t done the same for private student loans. Borrowers seeking to discharge student loans owed to private lenders like Sallie Mae, SoFi, Discover, and others still have to show undue hardship.

The Challenges of Discharging Private Student Loans

Private student loans often come with higher interest rates and lack income-driven repayment and forgiveness options, making it more difficult for borrowers to manage their debt. These factors can contribute to a borrower’s case for undue hardship, as they may face:

  1. Unaffordable payments

  2. Damaged credit scores due to missed payments

  3. Difficulty qualifying for employment opportunities and housing

  4. Potential lawsuits leading to wage garnishment, bank account seizure, and liens on their property

But not all loans that borrowers consider “private student loans” are subject to the same stringent discharge requirements. Some private loans for educational purposes can be discharged in a normal bankruptcy proceeding, just like most other consumer debts. These may include:

  • Loans where the amount was higher than the cost of attendance (tuition, books, room, and board)

  • Loans for education at unaccredited colleges, foreign schools, or unaccredited training and trade certificate programs

  • Loans for fees and living expenses while studying for professional exams, such as the bar exam

  • Loans for fees, living expenses, and moving costs associated with medical or dental residency

  • Loans to students attending school less than half-time

If you’re considering bankruptcy to discharge your private student loans, it’s essential to work with an experienced attorney who can help you navigate the complexities of the process and determine whether your loans may be eligible for discharge under normal bankruptcy proceedings or if you’ll need to prove undue hardship.

Related: Can You File Bankruptcy on Private Student Loans?

Bottom Line

Discharging student loans through bankruptcy is complex, but with the right guidance, it’s possible to achieve a fresh start. As an experienced attorney who has helped countless individuals successfully navigate this process, I’m here to help you understand your options and develop a personalized strategy.

Schedule a call with me today, and let’s work together to take control of your financial future.

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How do I prove undue hardship for student loans?

To prove undue hardship for student loans, you must demonstrate that repaying your loans would prevent you from maintaining a minimal standard of living, that your financial situation is likely to persist, and that you've made good faith efforts to repay your loans.

What circumstances does a person need to prove to have their student loans discharged?

To have student loans discharged in bankruptcy, you must prove undue hardship by showing that repaying your loans would prevent you from maintaining a minimal standard of living, that your financial situation is unlikely to improve, and that you've made good faith efforts to repay your loans.

Is getting student loans difficult to get discharged?

Yes, getting student loans discharged through bankruptcy is difficult. You must file an adversary proceeding and prove undue hardship using either the Brunner Test or the Totality of the Circumstances Test, which require demonstrating that repaying your loans would cause extreme financial hardship.

Can student loan debt be Cancelled?

Student loan debt can be cancelled through various means, such as Public Service Loan Forgiveness, income-driven repayment plan forgiveness, or disability discharge. In some cases, filing for bankruptcy and proving undue hardship may also lead to the cancellation of student loan debt.

What happens if I never pay my student loans?

If you never pay your student loans, you may face severe consequences such as wage garnishment, tax refund seizure, damage to your credit score, and difficulty obtaining future credit. In some cases, your loans may default, leading to additional penalties and legal action from your lenders.

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