Private Student Loan Bankruptcy: Discharge Rules & Tactics

Private student loans can be discharged in bankruptcy when they don’t meet the legal definition of a Qualified Education Loan. Loans that fall outside that definition are treated like ordinary consumer debt and can be eliminated without proving undue hardship. Loans that do qualify as education debt follow the hardship path. This guide explains both routes and how private lenders respond in bankruptcy.

Related: How Private Loans Fit Into the Overall Student Loan Bankruptcy System

Private loans are automatically dischargeable in bankruptcy when they are not Qualified Education Loans under 11 U.S.C. § 523(a)(8). Loans that fall outside this definition are treated as ordinary consumer debt and do not require a hardship showing.

A private loan may be non-qualified when it was:

• used at a school that was not eligible for federal aid

• deposited directly to the borrower instead of being certified by the school
  issued in an amount that exceeded the school’s Cost of Attendance

• used for expenses that were not tied to an eligible education program

In an adversary proceeding, the lender must show the loan meets the Qualified Education Loan requirements. Courts look to that documentation to determine whether the loan qualifies as education debt.

Private loans used for eligible degree programs at accredited schools and within the school’s Cost of Attendance typically qualify as Qualified Education Loans. These loans are protected under 11 U.S.C. § 523(a)(8) and can be discharged only by meeting the undue hardship standard.

Courts apply different hardship tests depending on where you live. Most jurisdictions use the Brunner framework, while some—such as the Eighth Circuit—apply a Totality of the Circumstances approach. The legal test does not change the process on this page; it only determines how a judge evaluates your financial situation.

Related: The Hardship Standard Courts Use to Evaluate Qualified Education Loans

Qualified private loans follow the same legal hardship standards as federal loans, but their repayment structure differs in ways that shape how courts view a borrower’s financial situation.

Key differences include:

• No income-based repayment. Private lenders do not offer income-driven plans, so payments are based on the contract rather than the borrower’s income.

• No statutory forgiveness programs. Unlike federal loans, private loans do not have program-based discharge or long-term forgiveness pathways.

• Balance acceleration in default. When a private loan defaults, the full balance becomes immediately due under the contract.

• State-level collection tools. Private lenders rely on lawsuits, judgments, wage garnishment, and bank levies, which can continue for many years.

Related: What Evidence Courts Look at in Hardship Cases

Private lenders handle bankruptcy differently from federal agencies. Because they pay their own legal costs, they often evaluate whether continued litigation is worth the expense once an adversary proceeding is filed. This business calculation leads some private lenders to consider settlement options during a case.

Common settlement outcomes include:

• Partial discharge — reducing part of the principal or interest

• Interest adjustments — lowering the rate or setting it to zero

• Extended repayment terms — lengthening the schedule to reduce monthly payments

Settlement decisions vary by lender and case. The outcomes reflect the lender’s assessment of cost, risk, and expected recovery, not a specific legal standard.

Private student loans are governed by state law, and most states limit how long a lender can sue to collect a defaulted loan. These statutes of limitations typically range from three to ten years. If the deadline has passed and the borrower has not made a recent payment or acknowledged the debt, the loan may be considered time-barred.

A time-barred loan can affect how a claim is handled in bankruptcy. Lenders must show that a debt is legally enforceable when they seek payment through a bankruptcy case. If the statute of limitations has expired, the claim may be subject to disallowance under state law.

Related: Student Loan Statute of Limitations by State

Most private student loans have a cosigner who shares full responsibility for the balance. Because private lenders treat the borrower and cosigner as jointly liable, either party can be pursued for payment.

Bankruptcy affects that liability differently depending on the chapter:

• Chapter 7: There is no automatic protection for cosigners. A lender may continue or begin collection against the cosigner while the case is open.

• Chapter 13: The co-debtor stay blocks collection against the cosigner during the repayment plan. This protection lasts only while the case remains active.

Related:

• How Bankruptcy Affects a Private Loan Cosignor

• How Private Student Loans Are Treated in a Chapter 13 Case