Can You Discharge Private Students Loans in Bankruptcy?

#1 Student loan lawyer

Updated on May 12, 2024

Can you discharge private students loans in bankruptcy? The answer is that they can be but unfortunately, it’s not particularly straightforward.

Last year, my team and I filed several private student loan bankruptcy proceedings across the United States. In each case, we removed some or all of the money our clients owed on these loans.

This process is difficult. And it isn’t guaranteed to work. Unlike credit card bills, medical bills, and other consumer debts, private student loans aren’t automatically cleared at the end of your bankruptcy case.

But when your lender doesn’t help with a payment plan you can afford, and you can’t refinance, and you’re worried about your and your cosigner’s credit score, filing for student loan bankruptcy might be your best and only choice.

Related: Who Made Student Loans Non-Dischargeable?

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When Can Private Student Loans Be Discharged?

Private student loans can be discharged in bankruptcy if you can prove either:

  • The loan isn’t a student loan under bankruptcy laws.

  • The loan will cause you and your dependents an undue hardship if you’re forced to repay the debt.

When Isn’t a Debt a Student Loan?

In order to see if you might be eligible for the first condition check to see if your student loan doesn’t meet the following requirements.

A debt is a student loan if:

  • It was made, insured, or guaranteed by the government.

  • It was made under any program the government or nonprofit funded.

  • It meets the IRS definition to be a qualified education loan.

All federal student loans meet at least one rule. But not all private student loans do. Some private loans don’t get government support and don’t meet the IRS’s ‘qualified education loan’ requirements. Two common ways they fail to meet these standards are:

  • The loans were more than the school’s cost of attendance. This means the money wasn’t just used for ‘qualified higher education expenses.’

  • The school you were attending when you got the loans wasn’t approved for federal financial aid, making it not an ‘eligible institution.’

When loans don’t meet these conditions, they can be discharged more easily as they won’t be considered a student loan any longer. But you still need a bankruptcy court to approve getting rid of the debt.

When Does a Private Student Loan Cause Undue Hardship?

A private student loan causes you an undue hardship if you can’t make the student loan payments throughout the repayment period while maintaining a minimal standard of living.

To determine whether you meet the undue hardship standard, bankruptcy judges look at your income, living expenses, work experience, education, age, where you live, and good-faith efforts to repay the loans.

Depending on where you live, the judge will review those things using the Brunner Test or the totality-of-the-circumstances test. Judges developed these tests to create a uniform way to make fair decisions in different cases.

But how judges use these tests can vary a lot.

This variance can make it much easier to obtain private student loan discharge in one location and harder in another, even with the same facts.

Does the Type of Bankruptcy Affect my Ability to Discharge my Private Student Loans?

The two most common types of bankruptcy filings are issued under Chapter 7 and Chapter 13. Each have provisions for discharging private student loans, but there are key differences in how they work and neither are easy.

Chapter 7 Bankruptcy and Private Student Loans

In Chapter 7 bankruptcy, discharging of private student loans requires initiating a separate legal process known as an “adversary proceeding.” This involves hiring a lawyer and proving to the court that loan repayment would cause undue hardship. If successful, you could have part or all of their student loans discharged.

Chapter 13 Bankruptcy and Private Student Loans

Under Chapter 13 bankruptcy, the debtor agrees to a repayment plan of their unsecured debts, including student loans, over a three to five year period. It is unlikely that the whole student loan debt would be paid off during this period. Once the repayment plan ends, unless the debtor successfully pursued an adversary proceeding, the remaining student loan balance would still be owed.

Bottom Line

The bottom line is that Chapter 7 gives you a chance to discharge your debt whereas Chapter 13 will most likely simply change your repayment plan.

Other Differences Between Chapter 7 and Chapter 13

While student loans may be a big part of your debt profile, you will want to consider the whole picture before deciding which type of bankruptcy to file for. Here is the overview of how two of the most popular bankruptcy filings work.

Chapter 7 Bankruptcy Overview

Chapter 7 bankruptcy, also referred to as “liquidation bankruptcy,” involves the selling off of the debtor’s non-exempt assets by a trustee. Proceeds are then used to pay off debts. This type of bankruptcy is typically filed by debtors with few or no assets, and it results in a discharge of most debts. The process generally lasts three to six months.

Chapter 13 Bankruptcy Overview

Chapter 13 bankruptcy, or “reorganization bankruptcy,” allows debtors to retain their property and reformulate their payment plans to repay the debts over a three to five year period. This type of bankruptcy is usually selected by individuals who have a regular income, considerable equity in their homes or other property, and who wish to avoid liquidation. It also allows for modifications of loans, including interest rates and extending the duration of the payment terms.

How to Discharge Private Student Loans In Bankruptcy

  1. Choose the Type of Bankruptcy: First, decide whether to file for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy is usually faster and less expensive, but it requires passing the ‘means test’ based on your income. If your income is too high for Chapter 7, you’ll need to go for Chapter 13, which involves a 3 to 5-year repayment plan.

  2. File for Bankruptcy: Next, file a bankruptcy petition in court. This step involves submitting detailed forms about your finances, including your assets, debts, income, and expenses.

  3. Find a Lawyer to Start a Separate Lawsuit for Your Student Loans: In bankruptcy, student loans aren’t cleared automatically. To discharge them, you need to file a separate lawsuit known as an ‘adversary proceeding.’ Related: How to File an Adversary Proceeding for Student Loans

  4. Prove the Loan Isn’t a ‘Student Loan’ or Show Undue Hardship: In the adversary proceeding, show that the loan doesn’t meet the legal definition of a ‘student loan’ or that repaying it is too difficult.

  5. Wait for the Court’s Decision: The court reviews your case to decide whether you’ve proven your case and can discharge some or all of your debt. If you lose, you’ll still owe your lender and must restart paying the debt.

  6. Finish the Bankruptcy Process: If you filed Chapter 7 and your student loans are discharged, other debts may also be discharged, concluding the bankruptcy. In Chapter 13, you will continue with the court-approved repayment plan, possibly adjusted for the student loan discharge.

Related: What Happens to Student Loans in Chapter 13?

If you want to discuss how we can help with your proceedings, book a call with us. As mentioned earlier, we’ve helped many borrowers navigate bankruptcy and free themselves from private student loan debt and we’d like to help you if we can.

Options If You Don’t Want to File Bankruptcy

Bankruptcy can help with lots of debt but also hurt your credit score. This makes it hard to get new credit. If you have private student loans, think about other choices before choosing bankruptcy:

  1. Refinancing Your Student Loans: With refinancing, a new private lender pays off your old loans and gives you a new one, maybe with a lower interest rate. But finding a lender willing to refinance all your debt can be challenging depending on your loan balance, financial situation, and whether you’ve recently taken deferments and forbearances.

  2. Income-Driven Repayment Plans: These plans are usually for federal loans, not private ones. They set your monthly payment based on how much you earn and your family size. Lowering your federal loan payment could help you pay your private loans.

  3. Loan Forgiveness Programs: Some jobs, especially in public service, might let you forgive some or all of your federal loans. The Biden administration’s Income-Driven Repayment (IDR) Waiver and other programs have forgiven loans for many people. Some states also help with private student loans.

  4. Debt Settlement: You might settle your debt by paying less than you owe. This can be a lump sum or a few payments. Remember, any forgiven debt might count as income for taxes. I’ve helped many people settle their student loans this way rather than filing for bankruptcy.

Related: Income-Driven Repayment: How It Works

The Biden Administration Hasn’t Helped

The Biden administration has made significant strides in forgiving federal student loans, with over $50 billion forgiven. And it would’ve forgiven over $200 billion more for millions more Americans had the Supreme Court not scuttled its broader debt relief plan.

Unfortunately, these relief efforts have not extended to private student loan borrowers. These individuals have been excluded from the student loan solutions implemented by the president, including the recent changes to the bankruptcy student loan discharge process.

Last year, through a collaboration between the Department of Education and the Department of Justice, the administration revamped the process for discharging federal student loans in bankruptcy. This initiative, in effect for over a year, aims to create a more accessible and equitable process, with notable features including new guidance to streamline bankruptcy student loan discharge.

  • A financial attestation form for borrowers to establish undue hardship.

  • Increased approval rates for discharge under the new policy.

Despite these improvements for federal loans, private student loan borrowers have been left without similar recourse. This disparity underscores a significant gap in relief efforts under the Biden administration.

Changes to the Bankruptcy Code are Unlikely

Meanwhile, Congress has tried to address the plight of private student loan borrowers through proposed legislation, though none have passed:

  • The Fresh Start Through Bankruptcy Act of 2021: Suggests discharging private and federal loans in bankruptcy ten years after the first payment is due.

  • The Private Student Loan Bankruptcy Fairness Act of 2019: Reintroduced in 2021 to make private loans automatically dischargeable in bankruptcy.

  • The Medical Bankruptcy Fairness Act of 2021: Proposes letting certain borrowers discharge their loans without meeting the undue hardship standard.

These efforts reflect a growing recognition of the need for bankruptcy law reform regarding student loans. But the lack of progress highlights the ongoing challenges private student loan borrowers face, who remain excluded from the recent federal loan discharge improvements.

Bottom Line

Discharging private student loans in bankruptcy is complex, but it’s increasingly possible. Unlike other debts, it involves specific challenges like understanding your loan’s details and facing the Brunner Test in court.

If you’re overwhelmed, my team and I are here to help. Book a call with us. As experienced student loan lawyers, we’ve helped many borrowers navigate bankruptcy to free themselves from burdensome private student loan debt.

We’re ready to do the same for you.

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Will bankruptcy get rid of private student loans?

Yes, private student loans can be discharged in bankruptcy. Still, it’s not a straightforward process, and it can be more challenging than discharging other types of debt like credit cards or medical debt.

What is the Private Student Loan Bankruptcy Fairness Act of 2023?

The Private Student Loan Bankruptcy Fairness Act of 2023, also known as H.R. 138, is a bill introduced in the U.S. House of Representatives that aims to change the treatment of private student loans in bankruptcy. Introduced by Congressman Steve Cohen and co-sponsored by Representatives Danny K. Davis, Julia Brownley, Eric Swalwell, Ro Khanna, and Gwen Moore, the bill seeks to restore the treatment of private student debt to its pre-2005 status.

Can you discharge Sallie Mae student loans in bankruptcy?

Yes, Sallie Mae student loans, many of which are now managed by Navient (and recently renamed Aidvantage), can be discharged in bankruptcy, but it’s not an easy process. You must first file for bankruptcy and then start an adversary proceeding—a lawsuit within your bankruptcy case.

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