Student Loan Debt in Bankruptcy

Most debtors won't 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

To have your student loan discharged 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. Also, 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.

Regardless of the test used, most courts are reluctant to discharge a student loan. However, if you have very low income or your loan is from a for-profit trade school, you might have a better chance.

The Brunner Test

Some courts use the Brunner test. Under this standard, you can discharge your student loan 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 loan.
• Persistence. 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 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 is an undue hardship for you to repay your student loan.

Other Tests

There are other tests, such as a special test for Health Education Assistance Loans (HEAL) in which 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, too. To find out the test used in your jurisdiction, talk to a local bankruptcy attorney.

Procedure to Discharge Your Student Loan in Bankruptcy

If you want to try to discharge your student loan in bankruptcy, you must file an adversary proceeding to determine dischargeability with the bankruptcy court. But that's not all. You'll need to present evidence and prove to the court that payment of your loans will cause an undue hardship. It's likely that you'll need to retain an expert to testify about your ability to be gainfully employed in the future.

Raising Defenses to Student Loan Debt in Bankruptcy

You might 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. If you succeed, you won't owe the debt at all, making the dischargeability issue moot.

Consider Consulting With an Attorney

You'll find the Brunner test or other standards applied to Chapter 7 and Chapter 13 debtors in lots of court cases. Knowing how the court in your jurisdiction ruled previously could help you determine the likelihood of your success.

If you have a substantial amount of student loan debt, it might be worthwhile to consult with a local bankruptcy attorney. The chances are that if you decide to litigate either the dischargeability issue or assert a defense to the loan in bankruptcy court, you'll need an attorney to represent you.

What Happens If Your Student Loans Aren't 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'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.

Government Versus Private Loans

The federal government is the lender for a significant percentage of student loans. (The federal government started making loans directly in 2010.) However, private financial institutions, such as banks, also offer loans to students, primarily because many students cannot fund their entire education without such supplementation. It doesn't matter whether you have a government or a private student loan. To discharge either in bankruptcy, you must show that repaying the loan would cause undue hardship.