Student Loan Debt in Bankruptcy

You want to know whether you can file bankruptcy on federal student loans. The answer is yes, erasing or "discharging" federal student loan debt in bankruptcy is possible. To qualify for a student loan discharge, a bankruptcy debtor must file an "adversary proceeding" along with a Chapter 7 or 13 petition and demonstrate an "undue hardship" at trial.

The factors a debtor must prove include a current and future inability to pay, due to circumstances like disabilities or low wages. Although stringent and difficult for most to meet, the oversight now required by the Department of Justice (DOJ) helps streamline the process, making it easier and cheaper for those who can meet student loan discharge requirements.

Can You File Bankruptcy on Student Loans?

Bankruptcy works by allowing people overwhelmed by debt to "discharge" or erase credit card balances, medical debt, phone and utility bills, unpaid rent, personal loans, and more. But not all debts can be discharged. Support obligations and many tax debts are examples of "nondischargeable debt" that filers remain responsible for paying.

Student loans are also nondischargeable unless you successfully prove that you would face an undue financial burden if forced to repay them. Although the process has been complicated and costly in the past, with bankruptcy judges only granting student loan debt relief in extreme situations, changes to the student loan discharge process have improved the odds that those who qualify for student loan debt relief will receive it.

Improvements in Student Loan Bankruptcies

In 2023, Congress began requiring the Department of Justice (DOJ) to supervise the process and objectively analyze whether a debtor is entitled to a discharge. For borrowers, this means that the costs associated with student loan litigation could go down significantly if the DOJ reports are fair and accurate, and filers aren't required to hire expensive experts to testify to the filer's future ability to pay. Even more significant? The new student loan discharge process sends the message to bankruptcy courts that Congress wants student loan discharges within reach of more bankruptcy filers.

Filing Bankruptcy on Student Loans: Qualifying

When you file for bankruptcy, the court doesn't automatically determine whether you qualify for a student loan discharge. The opposite occurs. It's assumed that you'll remain responsible for paying them.

If you believe you qualify for a discharge, you must file a separate trial against the loan servicer called an "adversary proceeding." At trial, you must prove that you meet the factors below and, as a result, would suffer undue financial hardship if required to repay the loan.

"Undue Hardship" or "Brunner Test" Factors

Your state might have a slightly modified undue hardship or Brunner Test standard, leading to the same result. However, typically, the standards have varied little between states (your lawyer will advise you of any significant differences). Here's what you can expect to prove.

Present ability to pay. If you have enough money to pay your student loans, you won't clear this factor. So, how do you pass it? You must show that your expenses meet or exceed your income. The allowed calculation figures are on the student loan attestation form, or you can ask your bankruptcy lawyer for more information.

Future ability to pay. Will your financial situation improve enough to allow you to repay your loan in the future? If so, you won't meet this hurdle. Factors proving a future inability to pay include not holding a degree, being of retirement age, having a disability, chronic injury, or protracted unemployment history, and having an extended repayment status. If none of the factors apply in your case, the court will consider other facts when determining your future ability to pay.

Good faith efforts. The good faith element assesses whether you've reasonably attempted to earn money and pay the student loan. Contacting the lender about payment plans is a good-faith effort factor. Previous nonpayment won't automatically disqualify you, nor will failing to enroll in an income-dependent plan when you can provide a valid explanation.

Who Might Qualify?

Although every case is unique, several factors impact the outcome of a student loan discharge case more than others, with the common thread being wage instability.

Disabilities. If you demonstrate that you have a permanent disability preventing you from earning enough income to cover living expenses and student loan repayment, discharge will likely qualify.

Low wages and high expenses. Sometimes, the career someone trains for doesn't pay enough to cover modest living expenses and student loan payments. This situation might sway the bankruptcy judge if you meet all other criteria and lack marketable skills.

Age. Many will successfully use bankruptcy to eliminate student loans and other debts shortly after they retire, and exit bankruptcy without losing their retirement or other property if they have enough foresight to ensure bankruptcy exemptions protect their property. Learn about the exemptions in your state.

Unemployment history. Being unemployed for a prolonged period probably won't be enough to meet the required standard. However, debtors who can demonstrate that they'll be unlikely to secure adequate employment because their skills are no longer marketable, perhaps due to the advancement of artificial intelligence or some other reason, will likely qualify.

Other Options for Student Loan Relief

There's no way around it—declaring bankruptcy on student loans costs money, so before exploring bankruptcy, it's a good idea to check whether you'd qualify for a federal program to relieve student debt. The most common would be to switch to a program that would reduce monthly payments, such as those outlined in How to Get Out of Student Loan Debt.

Another helpful federal program offers student loan debt relief to people with total and permanent disabilities. People apply directly with Federal Student Aid, using a more straightforward and less expensive process than bankruptcy, to eliminate the following loan types:

• William D. Ford Federal Direct Loan (Direct Loan) Program loans
• Federal Family Education Loan (FFEL) Program loans
• Federal Perkins Loans
• Teach Grant service obligations (additional documentation required in some cases)

You'll qualify after providing disability documentation from the U.S. Department of Veterans Affairs (VA), the Social Security Administration (SSA), or an authorized medical professional. You'll find more about applying for total and permanent disability student loan forgiveness on the Federal Student Aid website. Another form of help includes student loan deferments for cancer patients.

Filing a Student Loan Bankruptcy: The Process

If nonbankruptcy options aren't available and you're ready to pursue bankruptcy, you should know that discharging student loans requires filing two separate matters. You must file the bankruptcy chapter that best meets your needs, and a separate bankruptcy trial or "adversary proceeding" requesting the student loan discharge.

Choosing Between Bankruptcy Chapters 7 or 13

If your income is low enough for a student loan discharge, you'll likely qualify for Chapter 7 bankruptcy (take the Chapter 7 means test to find out). Most people prefer Chapter 7 because it's usually over in four to six months, and filers don't repay creditors. However, not much else can be accomplished in Chapter 7.

In contrast, Chapter 13 can solve more financial problems than Chapter 7 because it involves paying creditors a portion of what they owe through a three- to five-year Chapter 13 plan. It's common to consider filing for Chapter 13 if you'd lose property in Chapter 7 that you'd like to keep, if you need help getting a home out of foreclosure, you want to prevent a car repossession, you'd like to pay nondischargeable debts over time, or you can reduce how much you owe on a secured debt.

Also, if you don't qualify for a student loan discharge, Chapter 13 might help you manage your student loans. For instance, you could file for Chapter 13 and receive temporary relief from high payments because you'll likely be able to pay a reduced amount during your Chapter 13 plan. However, you'll be on the hook for whatever amount is left after your repayment period ends. Another significant downside is that the time spent in Chapter 13 could erase all credit for the time paid into an income-dependent plan.

A bankruptcy lawyer is best positioned to help you decide whether it will be better to file for Chapter 7 or Chapter 13.

Filing a Separate Student Loan Adversary Proceeding

You initiate the student loan discharge by filing a complaint against the loan servicer and providing financial and student loan information on a new form, the student loan attestation form.

The DOJ uses the attestation form information and prior payment history when applying the undue burden factors described above and preparing the student loan discharge litigation report for the bankruptcy judge. You're entitled to a copy of the report, so be sure to request it.

Bankruptcy Timeline: What Happens After Filing

It's normal to have fears about the bankruptcy process; however, it's predictable, with tens of thousands completing the process each year. Here's a summary of what you can expect after filing for Chapter 7 or 13, and an overview of the student loan adversary process, with links to more extensive articles on the topics.

Chapters 7 and 13 Bankruptcy Process

Paperwork and automatic stay. The case begins after filing the bankruptcy petition, schedules, and other documents. An automatic stay goes into effect, which halts most collection actions against you. Creditors can't contact you for payment or continue many legal proceedings, such as lawsuits or wage garnishments, while the bankruptcy case is ongoing.

Appointment of the trustee. The bankruptcy trustee assigned to your case reviews your financial documents and assesses your assets. The Chapter 7 trustee's primary responsibility is to sell nonexempt property, if you have it, and distribute it to creditors who file timely proof of claims. The Chapter 13 trustee collects and distributes Chapter 13 payments to creditors according to the Chapter 13 plan. You'll provide financial documents or "521 documents" to the trustee.

Appearances. Approximately 20-40 days after filing, all filers attend a "341 meeting of creditors" for identity verification and to answer questions about assets they might receive and issues spotted in the petition. Creditors can attend, but usually don't. Chapter 13 filers also attend a Chapter 13 plan confirmation a few months after filing. The court reviews the Chapter 13 plan, takes arguments from opposing parties, and confirms (approves) it if it meets legal requirements.

Making Chapter 13 payments (Chapter 13 only). Filers begin making payments about 30 days after filing, before the plan is confirmed. Payments are usually made monthly and are distributed to creditors by the trustee according to a three or five-year repayment plan. If your financial situation changes during repayment, you might qualify to modify your plan. Learn about the motion process for modifying a plan.

Financial management course. All individual filers take a debtor education course and submit the certificate before receiving a debt discharge. Chapter 13 filers must also verify that certain debts, such as child support, are current and sometimes complete local forms.

Debt discharge. After the filer completes all requirements, the court enters a discharge order eliminating qualifying debts in Chapter 7, and any remaining balances on qualifying debts in Chapter 13.

Student Loan Adversary Filing Process

Adversary complaint and attestation form. In a separate filing from the mandatory bankruptcy forms, you'll file an adversary complaint to start the student loan proceeding, which will receive a different case number. You'll also provide financial and student loan information on a student loan attestation form.

Discovery phase. After your loan provider is served a copy of the summons, complaint, and attestation form, each side can request information from the other in what is known as "discovery." It's common for parties to ask for copies of documents and to send questions and statements for the other side to respond to, known as "interrogatories" and "requests for admissions." Depositions might also be set.

Trial phase. You put on evidence proving your case, and the loan provider presents a defense. The bankruptcy judge will consider the evidence and the Justice Department's opinion when deciding the case outcome.

For more information about trial procedure, read Represent Yourself in Court by Paul Bergman and Sara Berman, which provides detailed, step-by-step information about the federal court litigation process, including pretrial meetings, evidentiary rules, and more.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. Information needed to complete the official downloadable bankruptcy forms can be found on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.