The court order you got at the end of your Chapter 7 bankruptcy case wiped out your credit card debt, medical bills, and other unsecured debt, but it didn’t discharge your student loans. The Bankruptcy Code considers federal student loans and many private loans nondischargeable debts. To get rid of those, you’ll need to file a lawsuit known as an adversary proceeding.
Ahead, learn how student loans are treated in bankruptcy and what you can do to deal with them.
Why your student loans weren’t discharged in your Chapter 7
All federal student loans — Direct, FFEL, Perkins Loans — and most private student loans are considered “nondischargeable” debt in bankruptcy. To get rid of those debts, you must file an adversary proceeding.* Most borrowers don’t file this lawsuit. 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.
Bankruptcy laws stop nondischargeable debts from being erased in bankruptcy because doing so wouldn’t be in society’s best interest. Typically, this protected status is reserved for debts like unpaid child support and alimony, back taxes, criminal restitution, and so on.
Education loans were given this special legal protection because lawmakers feared that students would rush to bankruptcy to shed their debt after graduation. Keep in mind that unlike with mortgages and auto loans, student loan borrowers don’t place collateral against their education debt to protect the lender if they default. And unlike credit cards and personal loans, student loans don’t fully reflect the credit risk. The interest rate on student loans — at least with federal loans — isn’t tied to your credit score and is often much less than the rate you can get for personal loans.
Against that backdrop, it makes sense that Congress wanted to guard against people racing to bankruptcy court months after getting their degree. Left unchecked, that moral hazard could destroy student lending programs.
Learn More: When Did Student Loans Become Nondischargeable?
*Some of those debts you can’t get rid of even if you file an adversary proceeding.
How to discharge student loans
Filing an adversary proceeding is the only way to get your student loans discharged in bankruptcy, but that doesn’t mean it will work. In most cases, you can get rid of your loans only if you prove that repaying them would cause you “undue hardship.”
Related: Adversary Proceeding Student Loans
The legal definition of undue hardship is vague. It’s up to the bankruptcy judge to decide if your particular circumstances constitute undue hardship.
To do that, you’ll typically need to pass the Brunner Test,* which requires you to prove three things:
- You can’t maintain a minimal standard of living for yourself and your dependents if forced to repay the loans.
- Your financial situation will remain the same for most of the repayment period.
- You made a good faith effort to repay the loans.
*If you live in the midwest, you may need to pass a similar test known as the totality of the circumstances test.
Convincing a bankruptcy judge that you deserve to have your loans discharged is challenging — even if you’re old, have had the loans for a long time, and have a high loan balance. Often, the judge will look at your financial hardship and decide that what you believe is undue is ordinary.
But difficult doesn’t mean impossible. If you think you have a good case, you can file the lawsuit yourself or hire a student loan bankruptcy attorney to handle it.
Learn More: How to Prove Undue Hardship for Student Loans
Options if your student loan debt wasn’t discharged
If bankruptcy didn’t clear your loans, you still have options — especially since the White House has introduced several fixes to its federal student loan forgiveness programs. Here are three things you can do to shed your student debt.
- Enroll in an income-driven repayment plan. Borrowers with federal loans can switch to a payment plan that ties their bills to their income and family size and leads to loan forgiveness after 20 to 25 years of monthly payments. For a limited time, the Department of Education is giving borrowers credit towards IDR Loan Forgiveness for student loan payments they made under any repayment plan and periods when their accounts were in long forbearances and some deferments. Read more about the Limited IDR Forgiveness Waiver.
- Apply for public service forgiveness. If you’ve worked full-time for the government or a nonprofit employer since October 2007, you may qualify for Public Service Loan Forgiveness. The PSLF Program writes off your remaining loan amount tax-free after a decade of work in public service. The program was broken for years, but it’s working now. Last October, the Educaiton Department introduced a temporary waiver that gives borrowers credit towards PSLF for all payments, including those they made for the wrong type of loan. Read more about the PSLF Waiver.
- Refinance private loans. Refinancing your private loans can lead to a lower interest rate and better student loan repayment options. But qualifying for the best terms without a cosigner will be challenging with a recent bankruptcy filing on your credit report. Use an online marketplace like Credible to compare rates with multiple lenders at once to find out your options.
The bankruptcy discharge order you got at the end of your case didn’t eliminate your student loans. You’ll need to return to court and start a separate bankruptcy proceeding to get a student loan discharge.
Let’s talk if you want to explore your chances of going through that process to get some sort of debt relief.