What you want to know is this—can you file bankruptcy on student loans? The answer is yes, it’s possible to discharge student loan debt in bankruptcy, but it’s never been likely for most people. The process is complicated and costly, and bankruptcy judges only grant student loan debt relief in extreme situations, leaving a small percentage of people to benefit.
However, changes to the student loan discharge process have improved the odds that those who qualify for student loan debt relief will receive it. In this article, you'll learn what's required to discharge student loan debt and alternatives if your student loans are ineligible.
A bankruptcy filing allows people overwhelmed by debt to get a fresh start. The bankruptcy “discharge” erases credit card balances, medical debt, phone and utility bills, unpaid rent, personal loans, and more.
But not all debts can be discharged. For instance, support obligations and many tax debts are examples of “nondischargeable debt.” Student loans are also nondischargeable in most instances, and you remain responsible for the balance after bankruptcy.
However, you can erase student loan debts if you successfully prove that paying them back would be an “undue burden.” Below, we explain the process and what is required to meet the undue burden standard.
Meeting the undue burden standard has always been challenging. And although many have hoped Congress would ease student loan discharge laws, they remain as strict as ever.
However, some improvements have been made. The Department of Justice now oversees the student loan discharge proceedings to help maintain a transparent process and ensure those who qualify receive the appropriate relief.
Although challenging, getting rid of student loan debt is still possible. However, you’ll likely want to exhaust all options before turning to bankruptcy. Below, we cover bankruptcy and nonbankruptcy alternatives, with the simplest and most effective options listed first.
The most common federal programs provide repayment options to reduce monthly payments. You’re likely familiar with these, but if not, you’ll find details in How to Get Out of Student Loan Debt.
The most 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 that can eliminate the following loan types:
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.
Learn about student loan deferments for cancer patients.
Before filing for bankruptcy, you’ll want to know if you can establish the undue hardship factors necessary to erase your student loans. You must prove each of the following factors.
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 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, other facts will be considered to determine 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 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.
The Justice Department analyzes these factors in a litigation report provided to the bankruptcy judge assigned to the student loan discharge lawsuit. You're entitled to a copy, so you or your lawyer should request the report. Your state might have a slightly modified standard leading to the same result; however, traditionally, the standards have varied little between states. Your lawyer will advise you of any significant differences.
If you can satisfy the undue hardship factors, filing for bankruptcy might offer student loan debt relief. To start the process, you must file two separate matters—the bankruptcy chapter that best meets your needs and a separate bankruptcy trial or “adversary proceeding” requesting the student loan discharge.
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.
But Chapter 7 doesn’t solve all financial problems. Consider filing for Chapter 13 if you’re facing one of the following common situations (others exist):
In Chapter 13, filers repay creditors a portion of what they owe through a three- to five-year Chapter 13 plan. Learn whether it's better to file for Chapter 7 or Chapter 13.
You’ll start the bankruptcy process by filing the mandatory bankruptcy forms. You’ll file a separate complaint to begin the student loan adversary proceeding, and each matter will receive a different case number.
When you file the adversary proceeding, you’ll also provide financial and student loan information on a student loan attestation form. The Justice Department and the Department of Education apply the undue burden factors described above and prepare a student loan discharge litigation report for the bankruptcy judge. You're entitled to a copy of the report, so be sure to request it.
After your loan provider gets served with a copy of the complaint, the discovery phase begins, and each side can request information from the other. At trial before a bankruptcy judge, 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.
If you don’t qualify for a student loan bankruptcy discharge, you might have another option. It is possible to use bankruptcy to manage your student loan debt instead of eliminating it. 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.
Did you know Nolo has made the law accessible for over fifty years? It’s true, and we want to ensure you find what you need. Below, you’ll find more articles explaining how bankruptcy works. Also, 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.
Updated March 26, 2024
]]>Student loans aren’t automatically discharged in Chapter 7 or Chapter 13 bankruptcy—and wiping them out isn’t easy. To discharge either federal or private student loans, you must bring a separate action within your bankruptcy case (called an adversary proceeding) and demonstrate to the court that repaying your student loans would cause you undue hardship.
Courts have come up with various standards that borrowers must meet to prove undue hardship. You can learn about those standards in Student Loan Debt in Bankruptcy.
This hardship test, however, applies only to educational loans. While that definition tends to include almost all loans you take out to pay for school, it usually does not cover debts you owe directly to an educational institution for tuition, room, board, and the like. But, keep in mind that this is only when such debts aren’t structured as a loan or extension of credit.
Some bankruptcy courts have ruled that the hardship test does apply if the school essentially provided you with a loan to pay the tuition. If you still owe tuition in the form of a loan, then you’ll likely have to meet the undue hardship test to discharge the tuition debt.
An adversary proceeding is essentially a lawsuit. It starts with the filing of an adversary complaint and moves into the discovery phase wherein both sides can gather information from each other. Then, if the case doesn’t settle, the matter gets decided at a trial before a bankruptcy judge.
The judge will consider the evidence presented by both sides. As part of the evidence, an expert will usually testify about your current and future ability to work and employment prospects (or the lack thereof).
Of course, it would be difficult for most bankruptcy filers to complete this process without help. If you’re considering asking the bankruptcy court to discharge your student debt by way of an adversary proceeding, you might want to start by consulting with a bankruptcy litigation lawyer.
]]>Many parents take out PLUS loans to help finance their children’s education. (PLUS loans are also available for graduate students to take out on their own.) Parents can take out a PLUS loan for an undergraduate student who is a dependent and who is in school at least half time. With a PLUS loan, the parent is the usually the sole obligor on the loan. This means that the student doesn’t owe the debt, only the parent does.
Student loans can be wiped out in bankruptcy only if you can demonstrate to the court that to repay them would cause undue hardship to you and your dependents. The undue hardship test is not an easy one to meet.
What constitutes undue hardship varies from court to court, although most courts follow the Brunner test, which requires the bankruptcy debtor to meet all of the following three criteria in order to discharge a student loan:
To learn more about the Brunner test, other factors courts consider, and the changing landscape of student loan discharges, visit our Student Loans in Bankruptcy topic area.
Unfortunately for parents, the same dischargeability standard for a student loan taken out by a student applies to parents who take out PLUS loans. The fact that the parent has not benefited in any way from the education does not matter. This means that if you have a PLUS loan and you file for bankruptcy, you must demonstrate to the judge that repaying the loan would cause undue hardship to you.
The undue hardship test is not a complete barrier. Courts have found that PLUS loan borrowers met the standard and discharged their loans. In fact, an older PLUS loan borrower may be in a better position than a young student to meet some of the Brunner factors. For example, an older PLUS loan borrower, who perhaps is retired, may have an easier time demonstrating that her financial hardship will last for a significant portion of the loan period (as opposed to a younger recent graduate who has a whole career ahead of her). In the same vein, older PLUS loan borrowers may be more likely to be disabled or physically impaired, limiting their job prospects and future earning capacity.
In most cases, if you want to discharge a PLUS loan in bankruptcy, you should bring a separate action within the bankruptcy case, called a complaint to determine dischargeability. In the complaint you ask the judge to rule that your PLUS loan is dischargeable. The proceeding is like a mini-lawsuit – you can do discovery and present witnesses and/or evidence in court at the hearing on the matter. Student loan creditors usually oppose these types of complaints, so most bankruptcy filers will need an attorney to help.
]]>Although most unsecured debts are discharged (wiped out) in bankruptcy, student loans are different. If you want to discharge a student loan in bankruptcy, you must bring a separate action within your bankruptcy case (called a complaint to determine dischargeability) and demonstrate to the court that repaying your student loan would cause undue hardship for you and your dependents.
What constitutes undue hardship varies from court to court, although most courts follow the Brunner test, which requires the bankruptcy debtor to meet all of the following three criteria in order to discharge a student loan:
To learn more about the Brunner test, other factors courts consider, and the changing landscape of student loan discharges, visit our Student Loans in Bankruptcy topic area.
What if you didn’t actually take out the loan to provide for your education, but instead merely cosigned a student loan with someone else, perhaps a child, spouse, or other relative? If you file for bankruptcy, must you still meet the undue hardship test in order to discharge your obligation to repay the student loan?
Some time ago, courts came out both ways on the question of cosigned student loans. Some would discharge the student loans of a cosigner without requiring the cosigner to meet the undue hardship test; others would not.
Recently, most bankruptcy courts considering this issue have ruled that a cosigner on a student loan is subject to the same discharge standard as the student loan borrower. The only federal appellate court to consider this issue, the Third Circuit Court of Appeals, came to the same decision. In re Pelkowski, 990 F.2d 737 (3rd Cir. 1993). This means that if you want to discharge your obligation to repay a student loan that you cosigned, you’ll have to meet the undue hardship test.
Keep in mind that the court will consider the factors as they relate to you, and not to the student for whom you cosigned the loan. So, for example, if you are living in poverty, you will most likely meet the first prong of Brunner, even if your son (the student borrowr) is a top-flight lawyer in New York. On the flip side, if your daughter is making minimum wage after graduating from college but you are well-off, you probably won’t be able to discharge your obligation to repay a student loan you cosigned with her.
The bankruptcy discharge applies only to the bankruptcy filer’s obligation to repay the debt. If the student you cosigned a loan with files for bankruptcy and discharges his or her obligation to repay the loan, you are still on the hook for the debt. Likewise, if you, as the cosigner, are able to discharge your obligation on the cosigned student loan, the student for whom you cosigned will still be on the hook for the debt.
There is a bit of a reprieve, however, if you file for Chapter 13 bankruptcy. In that type of bankruptcy, the automatic stay (which prohibits most collection efforts during the bankruptcy case) will apply to the cosigner as well. So if your son files for Chapter 13 bankruptcy and you cosigned a student loan with him, the student loan creditor cannot attempt to collect the loan from you during your son’s bankruptcy (unless the creditor successfully petitions the court to remove the stay). In Chapter 7 bankruptcy, however, the automatic stay won’t stop collection actions against nonfiling cosigners. (Learn more about what happens to cosigned debts in bankruptcy.)
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