Q: Can you file bankruptcy on private student loans?

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Stanley tate

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You can file bankruptcy for student loans, including private student loans. You can do so even if you’re current on your repayment. To do it, you must do two things:

  1. file chapter 7 bankruptcy or chapter 13 bankruptcy and
  2. file an adversary proceeding to discharge your private student loan debt.

The first part, filing bankruptcy, will eliminate your unsecured debt and sometimes your secured debt. The second part, filing an adversary proceeding, may or may not eliminate your student debt. Success depends on whether you can convince a bankruptcy judge that repaying your student loan debt will cause you and your dependents an undue hardship.

Over the years, I’ve found it’s easier to convince a bankruptcy judge that your private student loans should be discharged in bankruptcy than it is to prove that your federal student loans should be.

You can file bankruptcy for student loans, including private student loans. You can do so even if you’re current on your repayment or in deferment. You don't have to be delinquent or in default.

To do it, you must do two things:

  1. file chapter 7 bankruptcy or chapter 13 bankruptcy in federal court and
  2. file an adversary proceeding to discharge your private student loan debt.

The first part, filing bankruptcy, will eliminate your consumer debt, both unsecured debt and, sometimes, your secured debt. The second part, filing an adversary proceeding, may or may not eliminate your student debt. Success depends on whether you can convince a bankruptcy judge that repaying your student loan debt will cause you and your dependents an undue hardship.

Over the years, I’ve found it’s easier to convince a bankruptcy judge that your private student loans should be discharged in bankruptcy than it is to prove that your federal student loans should be.

What the Bankruptcy Code says about discharging private student loans

Section 523(a)(8) of the Bankruptcy Codes is the law that details when student loans are dischargeable in bankruptcy. Under that section, a student loan is nondischargeable unless it would impose an undue hardship on the debtor and the debtor’s dependents.

The Bankruptcy Code doesn’t define undue hardship. So to answer whether a debtor meets the eligibility requirements to discharge student loan debt, bankruptcy judges developed different tests. The most popular of those tests is the Brunner Test.

Under the Brunner test, the bankruptcy court asks three questions:

  1. Based on your current income, can you maintain a minimal standard of living for you and your dependents while repaying your student loan debt?
  2. Is your financial situation likely to stay the same for a significant portion of the repayment period of the student loans?
  3. Have you made a good faith effort to repay your student loans?

If the answer to each of these questions is yes, then you will have met the undue hardship standard and the bankruptcy judge will enter an order declaring your student loan debt discharged.

Click here to read Creating the Brunner Test: Analysis of Brunner v New York State Higher Education

How to discharge private student loans in bankruptcy

To discharge student loan debt in bankruptcy, you have to first file a bankruptcy case and then file an adversary proceeding.

The adversary proceeding is the name given to lawsuits in bankruptcy proceedings.

You can file the AP before your bankruptcy case ends. You can also file it after you’ve gotten a bankruptcy discharge. If you wait until then, you’ll have to file a motion to reopen your bankruptcy case.

The motion to reopen doesn’t get rid of your bankruptcy discharge. And it doesn’t reset the clock or hurt your credit score.

Instead, the motion allows the bankruptcy clerk to connect the adversary proceeding to your bankruptcy case.

Click here to learn How to File an Adversary Proceeding for Student Loans.

How do private student loans differ from federal student loans in bankruptcy?

Section 523(a)(8) of the Bankruptcy Code says that an education loan is nondischargeable absent undue hardship if:

  1. the loan was made by the government
  2. the loan was made under a loan program guaranteed by the government
  3. the loan was made under a loan program funded by a nonprofit or
  4. the loan is a qualified education loan within the meaning of the Internal Revenue Code
The Bankruptcy Code also says that an educational debt can't be discharged if it's an educational benefit, scholarship, or stipend. But there are a bunch of recent cases, including from Circuit Courts, that say that a loan isn't an educational benefit within the meaning of § 523(a)(8)(A)(ii).

Right away, we can see that number 1 and 2 apply to loans made by the Department of Education. So federal loans are clearly covered.

But what about a loan made by a private lender under a loan program funded by a nonprofit? To answer that, we have to know what funded means. The case law on this point is really weak, in my opinion.

When does a nonprofit fund a loan program?

Historically, bankruptcy courts have said that a nonprofit has funded a loan program if it meaningfully participates in the program.

Over time, bankruptcy judges have said that a nonprofit meaningfully participates in a program by guaranteeing the loans made under the program.

This interpretation is weak because if Congress wanted to protect loans made under a program guaranteed by a nonprofit, they could have said that.

We know they knew how to say it because they used the word guaranteed in the clause immediately before it used funded.

When is a private student loan a qualified education loan?

A private student loan is a qualified education loan if:

  • the student was attending a school that participated in the federal student aid program and
  • the loan did not exceed the student's cost of attendance for the period the loan was made.

Admittedly, that's a shorthand answer to what makes a loan a qualified education loan.

To fully understand what a qualified education loan is, you have to read several different parts of the Internal Revenue Code.

Typically, when I argue these cases, I win this argument by showing proof from the student's financial aid office that the private student loan was made for much more than the cost of attendance.

Is it easier to get private student loans discharged in bankruptcy?

Bankruptcy laws (particularly case law) makes it difficult to discharge all educational loans no matter if they come from the Department of Education or a private lender.

That said, in my experience, it's often easier to discharge or, at a minimum, settle private student loans than it is to do the same for federal student loans.

There are two reasons why this is.

First, private student loan holders like Navient don't offer monthly payments based on your income. The federal government does. It's hard to say you can't afford a $0 payment, which is what you can get with a federal loan. It's a lot harder to say you can't afford whatever your lender is demanding.

Second, bankruptcy law leaves more wiggle room to argue that a private student loan doesn't meet the eligibility requirements to be a student loan under the Bankruptcy Code.

As I shared above, the Bankruptcy Code sets out four specific ways that an education loan can become nondischargeable in bankruptcy.

Federal student loans are clearly covered by the law. But the law isn't quite as clear on which private student loans are covered. This is where and when I get to use my legal skills to argue that my client's student loan isn't a student loan within the meaning of section 523(a)(8).

When should I file bankruptcy for private student loans?

In my practice, I rarely recommend a student loan borrower try to discharge a federal student loan. For most people, it’s really hard to do so. The federal government’s income-based repayment plans and loan forgiveness programs make it difficult to prove that your federal loans are causing you an undue hardship.

Click here to learn How to Discharge Federal Student Loans in Bankruptcy.

My advice changes, however, if my client is trying to get rid of a private student loan. I’ve found that it’s often easier to get a favorable result (discharge or settlement) for a private student loan in bankruptcy than it is for a federal loan.

Here are the things I look to in deciding whether to advise a borrower to try and discharge their private loan debt:

  • They already filed for bankruptcy;
  • They were sued by one of their private lenders;
  • Their loan balance is double their annual income
  • They can’t afford a debt settlement; or
  • Their loan servicer refuses to offer payments or repayment plan they can afford.

How will bankruptcy affect my credit score

No matter the type of bankruptcy you choose, a bankruptcy filing will likely tank your score. But from what my clients have told me, the hit only lasts about a year or so. After that, their credit score bounces back.

Knowing the drop is temporary, I think filing bankruptcy to deal with your student loan debt makes more sense than struggling for years trying to make student loan payments you can’t afford.

Sure, your credit report will take a hit at first, but rebuilding credit is way easier than begging your lender each year for better loan repayment options.

Do I have to be in default to discharge student loans in bankruptcy?

For both federal student loans and private student loans, you don’t have to be in default to discharge student loans in bankruptcy.

You simply need to prove your repaying your loan debt would cause you an undue hardship.

Do I need to hire a bankruptcy attorney?

Filing for bankruptcy to discharge medical bills, credit card debt, etc. is already a complicated process. Add in having to file an adversary proceeding to discharge student loans, and the thought of a non-bankruptcy attorney successfully doing both is near zero.

So if it were me, I’d hire a student loan bankruptcy attorney.

That’s easier said than done.

Trying to find a lawyer who’s actually argued a student loan discharge case before a bankruptcy court is hard. Few have actually done it.

For instance, in 2019, I filed more student loan discharge cases in the bankruptcy court near me than all other lawyers combined. (And I only filed five.)

Final Thoughts

If you’ve had trouble for years repaying your student loans, bankruptcy is an option.

It’s possible for student loan borrowers to discharge both their private student loans and federal student loans in bankruptcy.

The key comes down to whether they can prove that being forced to make their loan payments will cause them and their dependents an undue hardship.

Proving undue hardship is difficult. It involves researching how judges in the court near you have decided past student loan bankruptcy cases and producing evidence demonstrating your financial situation.

Before you try and file a student loan bankruptcy on your own, speak with an attorney who knows what they’re doing.

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Hey, I’m Tate.

I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

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