Q: What happens to student loans in bankruptcy chapter 7?

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Two things happen with student loans when you file a chapter 7 bankruptcy case. First, your wage garnishment for student loans will stop. Second, your loans will go into an administrative forbearance/deferment. Both things will remain until your bankruptcy case ends.

Once it ends, you’ll still owe your student loans. The only way to get rid of them under the Bankruptcy Code is to file an adversary proceeding to discharge your student loans.

The adversary for student loan discharge is ordinarily not included in the fee your bankruptcy attorney charged.

Instead, if you want to get rid of your student loan debt, you'll likely have to pay your attorney a second fee to file the adversary.

Can you include student loans in a chapter 7?

You have to put your student loan debt in a chapter 7. The Bankruptcy Code requires you to list all of your debts on your bankruptcy paperwork. (You have to do the same in a chapter 13 bankruptcy as well.)

There's a difference, however, in (a) listing a debt and (b) whether that debt will be included in your bankruptcy discharge.

Most of your consumer debt (credit card debt, medical debt, personal loan debt, etc.) is automatically dischargeable. But other debts are not automatically discharged.

Both federal and private loans are the type of debt that is not automatically discharged.

Can student loans be discharged in chapter 7 bankruptcy?

You can discharge student loans in a chapter 7 case. But it’s not automatic. Under current bankruptcy laws, filing student loan bankruptcy requires you first open a lawsuit asking the bankruptcy judge to discharge your student loans as an undue hardship.

The bankruptcy process allows you to file the lawsuit anytime after filing for bankruptcy.

In my experience, because chapter 7 bankruptcy cases are over pretty quickly, most student loan borrowers file the lawsuit after their other unsecured debt is discharged in bankruptcy.

If you wait until after you get a discharge, you likely will need to file a motion to reopen your case with the bankruptcy court.

That motion won't reset your bankruptcy discharge.

Instead, the motion simply reopens your case so your lawsuit can be connected to it. Once that happens, your case is closed and your lawsuit remains open to see if can get a discharge of student loans.

How to discharge student loans in chapter 7?

There are two steps to discharge student loans in chapter 7:

  1. File a chapter 7 bankruptcy case.
  2. Open an adversary proceeding to discharge your student loans as an undue hardship.

To meet the undue hardship standard, you likely will have to pass the Brunner test or the totality-of-the-circumstances test.

Click here to learn How to Pass the Brunner Test to Prove Undue Hardship.

The Brunner test has three prongs or three questions:

  1. Based on your current income, are you unable to maintain a minimal standard of living while repaying your student debt?
  2. Is your financial situation likely to persist throughout the repayment period?
  3. Did you make a good faith effort to make your monthly payments?

If the answer is yes to all three questions, you’ve met the undue hardship standard. If any answer is no, you lose.

Regardless of which test is used, the question the bankruptcy court is trying to answer is this:

Can you make your student loan payments throughout the repayment period while maintaining a minimal standard of living?

Answering no to this question is difficult for student loan borrowers with federal student loans.

Most likely, you're already on some type of income-driven loan repayment plan. In fact, your loan payments are likely close to zero. This is why it's really hard to say you can't maintain a minimal standard of living and repay your student loans.

This is one of the reasons why it's often easier to discharge student loan debt held by private lenders than those held by the Department of Education.

Private student loans don't usually offer their loan borrowers income-based repayment plans.

Click here to see a Sample Adversary Complaint to Discharge Student Loans in Bankruptcy

Why was my student loan account closed after filing a chapter 7?

When your credit report shows that your student loan account was closed after filing for bankruptcy, chances are it was transferred to another company.

Filing bankruptcy may trigger the insurance (guaranty) on your student loan. When that happens, your loan balance is paid by the guaranty entity and now you owe that company for your loan.

Long story short: just because your student loan account was closed after filing chapter 7, doesn’t mean you no longer owe the debt. Unless you file the AP and get an order from the court saying your student loan debt was discharged, you still have to pay back those loans.

(And that's true even if your loans no longer show on your credit history.)

Contact your loan servicer and ask them about the repayment plans you qualify for.

Can I get a student loan after filing chapter 7?

You can still get federal student loans after filing chapter 7 bankruptcy. You’re eligible for federal student aid, including federal loans, unless you’re in default. Eligibility for federal student loans is not based on credit scores.

Private student loans, on the other hand, are based on credit scores. As a result, you may find it hard to get a private student loan after filing bankruptcy.

Final Thoughts

Discharging student loans in bankruptcy is impossible. But to do that, you first have to file for bankruptcy and then file an adversary proceeding asking for a student loan discharge due to hardship.

Because filing bankruptcy on student loans is a separate service from filing your case, be prepared to pay your bankruptcy lawyer a separate fee.

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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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