Student Loan Debt in Bankruptcy

Not many people try to discharge student loans in bankruptcy because it’s a costly and challenging process. But that might be changing.

By , Attorney

Yes, you can discharge student loans in bankruptcy. However, most bankruptcy lawyers advise bankruptcy filers that the process is complicated and costly, and bankruptcy judges only grant student loan debt relief in extreme situations.

But as the student loan crisis grows, the narrative changes, and bankruptcy judges might soon find more bankruptcy filers in their courts requesting student loan debt discharges. Learn:

  • when you can file bankruptcy on student loans
  • how a student loan discharge works, and
  • what will happen if you can't discharge your student loans in bankruptcy.

Once you've got an idea about how the student loan discharge process works, speak with a bankruptcy lawyer with experience in discharging student loans to find out more about discharging student loans in your local area.

Can You File Bankruptcy on Student Loans?

Yes, but erasing student loans isn't included in a standard bankruptcy filing. Discharging student loans requires additional steps, and even if you take them, there's still no guarantee the bankruptcy court will wipe them out.

How a Student Loan Discharge Works

Filing for bankruptcy lets you erase or "discharge" many types of debt, such as credit card balances, medical debt, phone and utility bills, unpaid rent, and personal loans. You can even wipe out a house payment or car loan if you return the home or car to the lender.

But not all debts go away in bankruptcy. For instance, filers can't discharge support obligations or debts incurred by fraud. Student loans also fall into the "nondischargeable debt" category, but they're slightly different. You can discharge student loans, but discharge doesn't happen automatically.

The Basic Bankruptcy Process

All bankruptcies start by filing bankruptcy forms with the court listing all your debts, including student loans. In the typical Chapter 7 process, you'd receive the bankruptcy discharge order wiping out your debts four months later, but it wouldn't include your student loans. The bankruptcy court would close your matter, and you'd still owe them.

Why is this?

Discharging student loans requires a separate bankruptcy trial or "adversary proceeding" that takes place only if you file a separate adversary complaint with the bankruptcy court. The complaint receives a different case number from your bankruptcy matter, and the lawsuit gets served on your loan provider.

The adversary litigation includes a discovery phase where each side requests information from the other, and the trial takes place before a bankruptcy judge. You put on evidence proving your case, and the loan provider presents a defense.

What you must prove at trial to win will depend on the test used by your bankruptcy court.

Proving a Student Loan Discharge Case in Bankruptcy Court

With all of the tests, the main thing you must prove is your inability to earn enough to repay your student loans. Be prepared to bring in an expert if you can't prove it some other way. Here are the specifics of each test.

The Undue Hardship Exception

Under this test, you'll show it would be an undue hardship to pay your student loans. The test varies between courts, with some taking an all-or-nothing stance. You either qualify to discharge the whole student loan or don't. Other courts will discharge a portion of a debtor's student loan.

The Brunner Test

Under this standard, you can discharge your student loan if you meet all three of these factors:

  • Poverty. Based on your current income and expenses, you wouldn't be able to maintain a minimal standard of living for yourself and your dependents if forced to repay your loan.
  • Persistence. Your current financial situation will likely continue for a significant part of the repayment period.
  • Good faith. You have made a reasonable faith effort to repay your student loan.

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 will be an undue hardship for you to repay your student loan.

Other Student Loan Discharge Tests

Other tests also exist, such as a particular test for Health Education Assistance Loans (HEAL). You must show that the loan became due more than seven years before, and repayment would impose an "unconscionable" burden on your life. To find out the test used in your jurisdiction, talk to a local bankruptcy attorney.

What Happens If the Bankruptcy Court Doesn't Discharge Your Student Loan?

In Chapter 7 bankruptcy, if you can't prove that paying your student loans would be an undue hardship, you'll still owe them when your bankruptcy case is over. However, Chapter 13 bankruptcy provides other help.

For instance, you'll likely 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. Also, ask your bankruptcy lawyer whether Chapter 13 will disqualify your income-dependant plan.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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