Student Loan Debt in Bankruptcy

You want to know whether you can 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.

Can Student Loan Debt Be Discharged in Bankruptcy? Bankrupting Student Loan Debt

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.

New Student Loan Developments

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.

Options for Student Loan 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.

Federal Programs to Relieve Student Debt

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:

• 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.

Learn about student loan deferments for cancer patients.

Can You File Bankruptcy on Student Loans? Qualifying for a Student Loan Bankruptcy Discharge

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.

Filing for Student Loan Bankruptcy

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.

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.

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):

• you'd lose property in Chapter 7 you'd like to keep
• you need help getting a home out of foreclosure
• you want to prevent a car repossession, or
• you'd like to pay nondischargeable debts over time.

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.

Starting the Student Loan Discharge Process

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.

Receiving a Student Loan Discharge Decision

The bankruptcy judge will consider the evidence and the Justice Department's opinion when deciding the case outcome.

Using Bankruptcy to Manage Student Loan Debt

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.

Need More Bankruptcy Help?

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!

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.