Student Loan Debt in Bankruptcy
Usually you cannot wipe out student loans in bankruptcy, but there is one exception.
Most debtors will not be able to discharge (wipe out) student loan debt in Chapter 7 or Chapter 13 bankruptcy. However, if you can prove that repaying your student loans would cause an undue hardship to you, you can get rid of your student loans in bankruptcy.
The Undue Hardship Exception
In order to have your student loans wiped out in bankruptcy, you must demonstrate that it would be an undue hardship for you to pay them. The test for determining undue hardship varies between courts.
Regardless of the test used, most courts are reluctant to discharge student loans. However, if you have very low income or your loans are from a for-profit trade school, you may have a better chance.
The Brunner Test
Some courts use the Brunner test. Under this standard, you can discharge your student loans if you meet all three of these factors:
- Poverty. Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
- Persisitence. Your current financial situation is likely to continue for a significant part of the repayment period.
- Good faith. You have made a good faith effort to repay your student loans.
The Totality of the Circumstances Test
Other courts use the totality of the circumstances test. Here, the court will look at all relevant factors in your case to determine if it is an undue hardship for you to repay your student loans.
Note. There is a special test for Health Education Assistance Loans (HEAL). You must show that the loan became due more than seven years ago and repayment would impose an "unconscionable" burden on your life.
Other courts use other tests. To find out what test or tests are used in your jurisdiction, talk to a local bankruptcy attorney.
Discharging All or Part of Your Student Loans
Many courts look at the undue hardship test as all or nothing—either you qualify to get the whole loan discharged, or you don’t. Other courts have discharged a portion of a debtor’s student loan.
Procedure to Discharge Your Student Loans in Bankruptcy
If you want to try to discharge your student loans in bankruptcy, you must file a formal complaint with the bankruptcy court, called a Complaint to Determine Dischargeability. It’s then up to you to prove to the court that payment of your loans will cause an undue hardship on you.
Raising Defenses to Student Loan Debt in Bankruptcy
You may have defenses to payment of your student loan debt, particularly if you attended a vocational or trade school. Examples include breach of contract, unfair or deceptive business practices, or fraud. You can raise these defenses in the creditor's Proof of Claim. If you succeed, you won't owe the debt at all, making the dischargeability issue moot.
Consider Consulting With an Attorney
There are lots of court cases that apply the Brunner test or other standards to Chapter 7 and Chapter 13 debtors. Knowing what the courts in your jurisdiction have done in the past could help you determine the likelihood of your success. If you have a substantial amount of student loan debt and do not have an attorney, it might be worthwhile to consult with a local bankruptcy attorney about this issue. And if you decide to litigate either the dischargeability issue or a defense to the loan in bankruptcy court, you’ll most likely need an attorney to represent you. (You can find one using Nolo's Lawyer Directory.)
What Happens If Your Student Loans Are Not Discharged?
If, as in most cases, your loans are not discharged in bankruptcy, here’s what happens.
Chapter 7 bankruptcy. In Chapter 7 bankruptcy, if payment of your loans is not an undue hardship, you’ll still owe them when your bankruptcy case is over.
Chapter 13 bankruptcy. If you can't discharge your student loans, Chapter 13 bankruptcy provides some other ways that can help. For example, you may be able to pay a reduced amount during your Chapter 13 plan—although you'll be on the hook for whatever amount is left after your repayment period ends. For detailed information on how Chapter 13 can help with student loans, see Nolo's article Student Loans in Chapter 13 Bankruptcy.
Other Options for Dealing With Student Loans
There are nonbankruptcy methods for dealing with student loan payments, from reducing payments to possibly even cancelling them. To learn more, check out Nolo’s Student Loan Debt area.