Filing Bankruptcy With Student Loans

Getting student loans discharged is difficult, but not impossible

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Even though some student loans are eligible to be discharged in bankruptcy, doing so is no easy task. Unlike credit cards or medical bills, having student loans discharged is notoriously difficult—but not impossible.

In July 2021, a New York-based federal appeals court ruled that private student loans could not be protected from discharge in a Chapter 7 bankruptcy. Federal student loans (which represent $1.6 trillion in collective student loan debt) may qualify for discharge if you’re able to prove “undue hardship.”

If managing your student loans has become a major financial burden, read on to learn how bankruptcy works, how to get student loans discharged, and alternatives you may want to consider.

Key Takeaways

  • Federal student loans are considered non-dischargeable in bankruptcy unless you can prove they cause you undue hardship.
  • There is no single official benchmark to determine undue hardship, but most bankruptcy courts rely on the Brunner Test, which is extremely difficult to pass.
  • A recent court ruling found that while private student loans may no longer be considered non-dischargeable in bankruptcy, a borrower must prove the loans were not utilized for “educational benefit” in order to be dismissed.
  • If you can’t afford your student loans, there are alternative repayment options, such as income-driven repayment plans and forgiveness programs.

Can Student Loans Be Discharged in Bankruptcy?

If you want your student loans and other debts discharged outright, you’ll need to file a Chapter 7 bankruptcy. But keep in mind there’s no guarantee your student loans will be discharged unless certain other criteria are met. If you don’t qualify to file Chapter 7, you may be able to restructure your student loan payments or have them discharged in a Chapter 13 bankruptcy. Once your Chapter 13 bankruptcy ends (within three to five years), you’ll be responsible for repaying your federal student loans if you weren’t able to prove undue hardship.

Chapter 7 bankruptcy

This type of bankruptcy can erase all existing debt, giving you a fresh start. It’s also known as a liquidation bankruptcy because you sell off your non-exempt assets to pay off your debts. It will stay on your credit reports for 10 years.

Chapter 13 bankruptcy

This option is also known as a reorganization bankruptcy, and involves working out a three- to five-year repayment plan with your creditors through the bankruptcy court, after which some of your remaining debts will be discharged. A Chapter 13 bankruptcy will stay on your credit reports for seven years.

Unlike other debts, such as credit cards, mortgages, and car loans, which are relatively easy to get discharged in a bankruptcy ruling, student loans are significantly more challenging.

Qualifying for Student Loan Bankruptcy Discharge

A discharge of your student loans may be possible if you prove you have an “undue hardship” that prevents you from making student loan payments, or—with private loans—if the loans did not provide an “educational benefit.”

With federal student loans, there is no standard set of guidelines for demonstrating undue hardship. Most courts rely on the Brunner Test, which requires you to prove that:

  • You wouldn’t be able to maintain a basic living standard if you made loan payments.
  • Your financial hardship will last an extended amount of time.
  • You made a “good faith” effort to repay your loans before filing for bankruptcy.

Not only are these circumstances extremely challenging to prove, the Brunner Test is somewhat subjective. “Not only every state, but every jurisdiction will have different standards in determining whether the Brunner Test applies,” said Leslie Tayne, a financial attorney and the founder and managing director of Tayne Law Group, in an email to The Balance.

It’s not the only test that exists, however. The courts of the Eighth Circuit, for example, use the “totality of circumstances” test, which looks at the borrower's overall situation. This benchmark is considered less restrictive than the Brunner Test.

Up until July 2021, this applied to both federal and private student loans. That’s when a New York-based federal appeals court ruled that student loans from private lenders may no longer be protected from discharge in bankruptcy like their federal student loan counterparts. In the case of Hilal K. Homaidan vs. Sallie Mae, Inc, Navient Credit Solutions, Inc., and Navient Credit Finance Corporation, the U.S. Court of Appeals for the Second Circuit ruled that Homaidan’s private student loans did not constitute an “educational benefit” within the meaning of the bankruptcy code and would therefore not be automatically non-dischargeable.

Navient has been involved in other actions regarding its lending practices, most recently in January 2022 when it agreed to a $1.85 billion settlement to resolve claims of predatory lending. Some 66,000 students will see their remaining private student loan balances canceled as a result of this settlement.

How Student Loan Bankruptcy Discharge Works

Regardless of loan type, if you decide to pursue bankruptcy for student loan debt, there are a few steps you need to follow.

Gather Your Records

Proving undue hardship in court requires a substantial amount of documentation. The process will go more smoothly if you organize your records ahead of time. Gather recent pay stubs and tax records for the past two years plus bank statements, bills, and other documents that show your expenses exceed your earnings.

If you are attempting to prove that a private student loan did not provide an “educational benefit,” be prepared to provide documentation to support your claim.

Find an Attorney

Although it’s not required, hiring a bankruptcy attorney—particularly one who has experience working with student loan borrowers—is an important step. An attorney can not only help you determine if filing for bankruptcy is the appropriate course of action, they can help you navigate the complex requirements of getting student loans discharged.

Complete Credit Counseling

Before you can file for bankruptcy, you’re required to complete a credit counseling session within 180 days. You’ll be provided a certificate of completion to file along with your bankruptcy petition. Your counseling session can likely be done online or over the phone.

When seeking credit counseling in preparation for a bankruptcy filing, you must work with an approved provider.

File for Bankruptcy

Once you’ve consulted with an attorney, determined what type of bankruptcy to file and completed your counseling, the next step is to file a bankruptcy petition and submit your paperwork.

Once your petition is accepted, the case is handed off to a trustee who organizes a meeting of creditors, also known as a 341(a) meeting. This meeting happens outside of court and is part of the discovery process in determining your financial situation and right to discharge. Usually, this meeting lasts about 15 minutes. Although it’s called a meeting of creditors, your creditors are not actually required to attend.

File for an Adversary Proceeding

Once you’ve officially filed for bankruptcy, you’ll need to file an adversary proceeding for your federal student loans. “The adversary proceeding states that your student loan debt causes undue hardship,” said Matthew Alden, a bankruptcy and debt relief attorney at Ohio-based Luftman, Heck & Associates LLP, in an email to The Balance. Once it’s filed, you’ll have to provide evidence of the hardship in court. The same appears to apply to those seeking to discharge private student loan debt, although they would need to prove that their loans did not constitute an “educational benefit,” as per the recent Second Circuit ruling. 

Learn the Outcome

If the court determines you are experiencing undue hardship because of your student loans, your debt may be partially or fully discharged, or you’ll be put on a repayment plan, depending on the type of bankruptcy you file.

If you aren’t able to pass the undue hardship test, you will still be responsible for repaying your student loans (although your other debts may be discharged or restructured as part of your bankruptcy case). If this happens, you can explore other alternatives to having your loans discharged in bankruptcy.

Alternatives to Bankruptcy

Bankruptcy isn’t your only option if your student loans are a significant financial burden.

You can consider switching your student loan repayment method to one of four income-driven repayment plans, which are available for federal loans. These plans extend the repayment term 20-25 years and reduce payments to 10%-20% of your discretionary income, depending on the specific plan. If you have any remaining balance at the end of the repayment term, it’s forgiven.

Discretionary income is the difference between your annual income and 150% of the poverty guidelines for your family size and state of residence.

"If you temporarily cannot afford your loans due to loss of income, a deferment or forbearance could help pause your loans while you get back on your feet.” Tayne said. These options don’t reduce what you owe—and if you are in forbearance, your loans will continue to accrue interest—but they could provide some breathing room until your financial situation improves.

You can also explore other methods of having your federal student loans discharged:

If your student loan debt is made up of private loans, you have fewer options. “If you have good credit, consolidating your loan balances to reduce your interest rate and/or lower your monthly payments could also help make your loans more affordable,” Tayne said. “Working with a reputable attorney who focuses on student loan debt to negotiate on your behalf is advisable for private student loans.”

Frequently Asked Questions (FAQs)

How is a co-signer affected if you file for bankruptcy for student loans?

If you took out student loans with the help of a co-signer, they’ll be affected by your bankruptcy, too. Having loans discharged in bankruptcy only eliminates your responsibility to repay the debt, not the co-signer’s. However, a Chapter 13 bankruptcy has a special provision that can protect co-signers.

Can you file for bankruptcy just for student loans?

In general, filing for bankruptcy on student loans is usually part of a larger bankruptcy case involving other debts. If you attempt to file for bankruptcy on student loans only, there is a strong chance your case will be rejected. However, it is possible. In fact, you can reopen a previous bankruptcy case that didn’t involve student loans to include an adversary proceeding, and have your loans discharged after the fact.

Article Sources

  1. United States Court of Appeals for the Second Circuit. "No. 20-1981 Hilal K. Homaidan v. Sallie Mae, Inc. Navient Solutions, LLC, Navient Credit Finance Corporation," Pages 1-2.

  2. Open Data Platform. "Federal Student Loan Portfolio," Download "Federal Student Aid Portfolio Summary."

  3. United States Courts. "Chapter 13 - Bankruptcy Basics."

  4. United States Courts. "Chapter 7 - Bankruptcy Basics."

  5. Experian. "When Is a Chapter 7 Bankruptcy Deleted?"

  6. St. John's University School of Law. "The High Burden of a 'Minimal Standard of Living' Under the First Prong of the Brunner," Page 2.

  7. Rebekah Keller. "The 'Undue Hardship' Test: The Dangers of a Subjective Test in Determining the Dischargeability of Student Loan Debt in Bankruptcy." Missouri Law Review.

  8. United States Court of Appeals for the Eighth Circuit. "Fern v. FedLoan Servicing."

  9. "Attorney General Josh Shapiro Announces $1.85 Billion Landmark Settlement With Student Loan Servicer Navient."

  10. Federal Trade Commission. "Filing For Bankruptcy: What To Know."

  11. United States Bankruptcy Court, Northern District of California. "What Is a 341(a) Meeting of Creditors?"

  12. Federal Student Aid. "Income-Driven Repayment Plans."

  13. Federal Student Aid. "In Some Cases, You Can Have Your Federal Student Loan Discharged After Declaring Bankruptcy."