To file for student loan bankruptcy, you will first need to file for Chapter 7 or Chapter 13 bankruptcy. You will then need to file an adversary proceeding (AP) to have your student loans considered for discharge. Essentially, you must prove that repayment of the loan would cause undue hardship.
- Student loans are more difficult to get discharged than other types of unsecured debt.
- Getting student loans discharged in bankruptcy requires an extra step of filing an adversary proceeding.
- Before declaring bankruptcy, consider alternatives such as deferment, forbearance, and income-driven repayment.
- The IRS may keep your tax refund and apply it to your federal loans if they are in default.
How Student Loan Bankruptcy Works
You can get student loans discharged in some cases, but the process is more complex than for other types of debt. Filing for student loan bankruptcy does not guarantee that your student loan will be discharged.
First, you must file for Chapter 7 or Chapter 13. Then, you'll need to take an additional step of filing an adversary proceeding. Falling behind on your payments can have a significant negative financial impact your financial life, including lowering your credit score. If you're considering failing to make payments and filing for student loan bankruptcy, weigh the pros and cons.
As of March 9, 2022, you can pause an active bankruptcy case, per the U.S. Department of Education's request to the U.S. Department of Justice. This pause is still in effect as of early August 2023.
How to File for Bankruptcy
Filing for either Chapter 7 or Chapter 13 bankruptcy requires completing extensive paperwork and disclosing your assets, income, debts, and expenses. The bankruptcy court will assign an impartial trustee to meet with your creditors to confirm your debts. You must also undergo credit counseling.
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, or liquidation, the trustee will sell off your nonexempt assets. Exempt assets vary by state, but often include your home, vehicles, and other valuable possessions. The trustee uses the proceeds to pay your creditors as much of your debt as possible, and the court discharges the rest.
To file Chapter 7, you must not have had another Chapter 7 bankruptcy discharged in the past eight years. Also, your current monthly income must fall below the state median income or must pass a means test. Certain debts cannot be discharged, such as taxes, alimony, and child support. Once your case is complete, you can file for student loan discharge.
Chapter 13 Bankruptcy
Many people turn to Chapter 13bankruptcy, or reorganization, when they can’t pass the Chapter 7 means test. They can also file if they don’t want to lose their home to foreclosure.
Chapter 13 entails creating a repayment plan that uses up to 100% of a debtor’s disposable income to repay creditors within three to five years. Repayment is supervised by the trustee, who collects a monthly payment from the debtor and redistributes it to the creditors as outlined in the repayment plan.
The bankruptcy court will determine your new monthly debt payments, including your new student loan payment.
Filing for Student Loan Bankruptcy
Before filing for bankruptcy, consider:
- Potential you may owe more: The bankruptcy court will decide how much you will pay each of your creditors each month. If you have other debts that are a higher priority than student loans, you could end up accruing additional interest on your student loans.
- If your only debt is your student loan: If you have no other debt, you are not likely to win your case to discharge your student loan.
- Your loan type: You may have a better chance of discharging or settling a private student loan in bankruptcy than a federal student loan. The reason is that federal student loans offer income-driven repayment plans, while private student loans do not.
- Filing costs: You must pay court filing fees unless the court waives them. If you have an attorney, the court might find that your circumstances aren’t dire enough to warrant a student loan discharge. Consider a lawyer who might take on your case pro bono or for a low fee. Visit the American Bar Association or your state bar association's website to find a lawyer.
Bankruptcy remains on your credit history for up to 10 years. Your credit score will likely decline significantly with a bankruptcy.
Filing an Adversary Proceeding
With student loans, you must take the additional step of filing an adversary proceeding in a bankruptcy filing. An adversary proceeding determines whether your debt should be discharged.
Included in the adversary proceeding paperwork is "a complaint." The complaint includes administrative details, such as your bankruptcy case number and the reasons you are seeking to discharge your student loans in bankruptcy, namely the circumstances of your undue hardship.
Student loans have stricter requirements for discharge, which are described in section 523(a)(8) of the U.S. bankruptcy code.
When to File an Adversary Proceeding: Chapter 7
If you file for Chapter 7, you can file the adversary proceeding right after filing your bankruptcy case. If you've already gone through Chapter 7 bankruptcy and your case has been closed, you may still be able to file an adversary proceeding to get your student loans discharged, depending on where you live.
If your Chapter 7 case is already closed, you must first move to reopen your bankruptcy case. This is procedural and does not restart the bankruptcy or eliminate the discharge you may already have received for your debt.
When to File an Adversary Proceeding: Chapter 13
In a Chapter 13 bankruptcy, when you can file an adversary proceeding also depends on the bankruptcy court rules where you live. Regardless of when you file, your student loan nightmare will not be over if you win the adversary proceeding. That's because you must wait until you've completed the necessary Chapter 13 plan payments and earned your discharge order for your other debts before your student loans will be discharged.
If you are allowed to file the adversary proceeding early, you might get the proceeding over with sooner and obtain a decision on your student loans. The table below compares Chapter 7 and Chapter 13 bankruptcy.
|Comparing Bankruptcy Options|
|Chapter 7||Chapter 13|
|Who can file||Current monthly income must fall below the state median or must pass a means test||Must have enough disposable income to make debt payments over three to five years; total secured and unsecured debt must not exceed$2,750,000|
|Relief available||Collection activity stops; all debts are wiped out except those the court deems nondischargeable and those that are never dischargeable, such as taxes and child support||Collection activity stops; can stop foreclosure and give you more time to catch up on mortgage payments; remaining balance on unsecured debts discharged after completing repayment plan on priority and secured debts|
|Timeframe for basic bankruptcy proceeding||As little as a few months||Three to five years|
|Timeframe for possible student loan discharge||As little as a few months||Three to five years|
|Cost||Court filing fees + attorney fees + assets you're required to give up||Court filing fees + attorney fees + assets you're required to give up|
|Effect on credit||Can stay on credit report for up to 10 years||Seven years after discharge; some creditors may view Chapter 13 more favorably than Chapter 7|
|Assets you get to keep||Varies by state||Varies by state|
Undue Hardship and Student Loan Discharge
To have your student loans discharged, you must demonstrate that not having them discharged would cause you to experience undue hardship and you must meet specific conditions.
Your student loan creditors—which may include lenders, servicers, and collection agencies, depending on the types of loans you have and how far behind you are on payments—mustalso meet specific conditions.
Most states use the Brunner test to determine what constitutes undue hardship. Essentially, the test assesses a person's current financial situation, their foreseeable future situation, and whether they have made a good faith effort to repay their loans.
The Totality of Circumstances Test
A few states use the totality of the circumstances test. It doesn't consider whether you’ve made a good-faith effort to repay your loans, such as consistent attempts to obtain employment, maximize income, and minimize expenses.
What Constitutes Undue Hardship
A court might agree that repaying your loans would be an undue hardship if:
- You can’t maintain a minimal standard of living for yourself and any dependents
- The hardship will continue throughout the loan’s repayment period
- You sincerely tried to repay your loans before filing for bankruptcy
A "minimal standard of living" is open to interpretation by the courts but it may mean;
- Your income has been below the federal poverty level (FPL) for several years and doesn’t show signs of improving.
- You’re on public assistance or dependent on a family member.
- You have a debilitating mental or physical illness or permanent injury.
- You have a child with a serious illness who requires round-the-clock care.
- Divorce reduced your household income.
- Disability checks are your only source of income.
- You depend on public assistance to support your children.
- You support a spouse who was seriously and permanently injured in a car accident or developed a total disability.
The common thread in these examples is that your situation is unlikely to improve in a way that would allow you to repay your debt. In addition, your expenses, which the bankruptcy court will scrutinize, should include only reasonably priced necessities, not luxuries or nonessential purchases such as restaurant meals, brand-name clothing, vacations, and even giving money to your independent adult child.
Federal Loans and Hardship
Your student loan holder may choose not to oppose your petition to have your loans discharged in bankruptcy court if it believes your circumstances constitute undue hardship or if it want to avoid the cost of litigation.
For federal loans, the Department of Education allows a loan holder to accept an undue hardship claim if the costs to pursue the litigation exceed one-third of the total amount owed on the loan, including principal, interest, and collection costs. Private student lenders are likely to apply similar logic.
If you plan to claim undue hardship for federal student loan repayment based on physical or mental impairment, you may not need to go to the bankruptcy court. You may qualify for automatic discharge under Total and Permanent Disability Discharge.
Other circumstances where you might avoid bankruptcy court and apply for administrative discharge are death, a closed school, a false certification, an unpaid refund, and borrower defense to repayment.
Forbearance, deferment, and loan rehabilitation are the other options for managing difficult federal student loan payments.
Federal student loan debt cancellation, which was announced by the Biden administration in August 2022 but later ruled unconstitutional by the U.S. Supreme Court on June 30, 2023, would have been an option for certain student loan borrowers, including:
- Up to $20,000 for those who received Pell Grants through the Department of Education
- Up to $10,000 for non-Pell Grant recipients
To have received debt cancellation under this policy, individuals and married couples could not have income in excess of $125,000 and $250,000, respectively. Borrowers could have even potentially received a refund for payments made during the COVID-19 payment pause.
In response to the Supreme Court's ruling, Biden announced changes to student loan administration including reducing the required minimum payment amount from 10% of discretionary income each month to 5% each month for undergraduate loans. Borrowers still have several paths based on their career and consistency with income-based repayments to receive debt forgiveness.
On June 30, 2023, the Supreme Court ruled that the Biden administration lacked the authority to cancel up to $20,000 federal student debt per borrower.
The three-year forbearance on student loan payments and interest is also set to end. Student loan interest will resume starting on Sept. 1, while required payments will be due starting in October.
Can You Get out of Student Loans Through Bankruptcy?
You can potentially get out of student loans through bankruptcy, though not always. The process is complicated. Before deciding to get out of student loans through bankruptcy, consider consulting a financial advisor to review your alternatives.
How Can I Get Rid of My Student Loans?
The easiest way to get rid of your student loans is to pay them off. There are various programs and resources that can help you manage your student loan debt burden. If you think you may have trouble paying your student loans, contact your lender to help you work through the burden. You can potentially get your student loans discharged in bankruptcy, but the process is complex.
Can Student Loans Be Discharged After 10 Years?
For eligible borrowers, student loans can be discharged after 10 years if the borrower meets the specified requirements for public service.
The Bottom Line
Going through the bankruptcy process doesn’t guarantee a specific result. The bankruptcy court could agree that repaying your student loans would cause undue hardship, and fully discharge your loans. Or, you may still have to repay what you owe, which may now include collection costs, the additional interest that has accrued, court fees, and attorney fees. Alternatively, you might have your loans partially discharged or restructured.
Weigh the pros and cons of bankruptcy, including all its potential outcomes and its impact on your credit score, before you file.