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Student Loans Student Loan Repayment

How to File for Student Loan Bankruptcy

Despite what many think, student loans can indeed be discharged by filing for bankruptcy. It’s considerably more difficult than discharging other debts, but it is possible in certain situations.

The key to success is demonstrating that you have an “undue hardship” due to the debts — that repaying those student loans would cause financial strife for you and any dependents you may have.

Are you dealing with unmanageable student loan debt? Here’s what you need to know about filing student loan bankruptcy.

In this guide:

How does student loan bankruptcy work?

There isn’t a type of bankruptcy designed just for student loans. You can, however, file for either Chapter 7 or Chapter 13 bankruptcy and then move to have your student loans discharged after you’ve submitted those filings.

That last step is done through an adversary proceeding, which is essentially a hearing within your existing bankruptcy case. It involves some extra paperwork, and you’ll also need to provide evidence that the debts are causing undue financial hardship for your household. An attorney may be necessary for this, and in some cases, you may even need an expert witness.

Chapter 7 vs. Chapter 13 bankruptcy

Before you can get to the adversary proceeding, though, you’ll need to file for bankruptcy first — either Chapter 7 or Chapter 13. While both can help you get back on track financially, the two differ in process and eligibility requirements, so you’ll want to choose carefully.

Chapter 7 bankruptcy requires liquidating all your assets (some items may be exempted, but that varies by state). The funds from those liquidated assets are then used to pay off your debts, and the remaining balances are discharged (canceled). To qualify for Chapter 7, you’ll have to fall under a certain monthly income or pass what’s called a means test.

Chapter 13 is a bit different. Rather than liquidating your assets and discharging your debts right away, this one redistributes your debts, essentially putting you on a payment plan that aims to pay off all or a portion of your debts within a few years. There’s also not a means or income test associated with Chapter 13. The problem with using Chapter 13 bankruptcy is that it might result in more interest costs in the long run.

When to consider bankruptcy

You should only consider bankruptcy if the situation is extremely dire. Bankruptcy can wreak havoc on your credit, remaining on your report for seven to 10 years. It can also mean losing your assets — and in some cases, even your car or home.

Typically, bankruptcy is a better option for private loan borrowers than federal ones. This is because federal loans come with several repayment plans that can drastically reduce your payments (or even wipe them out completely).

It’s also not an ideal solution if student loans are your only financial issue. This would likely make it hard to prove undue hardship — the key to getting those loans discharged. If you consider bankruptcy as a solution for tackling those student loan debts, make sure you have the evidence to prove undue hardship. We’ll go into that below.

Can you prove undue hardship?

If you can’t prove undue hardship, there’s no way to get your student loans discharged, no matter how your bankruptcy case fares.

Unfortunately, showing hardship is pretty difficult, and the exact method will depend on what state you’re in and the testing method used. Here are the two types that courts currently use when determining whether an undue hardship exists.

The Brunner Test

The Brunner Test is the most common test used in undue hardship petitions, and it stems from the 1987 court case Marie Brunner vs. New York State Higher Education Services Corp. In the suit, Brunner tried to have her loans discharged just ten months after graduating from her Master’s program — and just one month from her first loan payment’s due date. Her case was ultimately denied because she had not pursued alternative options (like deferment or forbearance, for example). She could not demonstrate that she would be unable to find work for a significant portion of the loan’s term.

As the court put it, “Such conduct does not evidence a good faith attempt to repay her student loans.”

The judgment also created a three-part test for proving undue hardship in the future. The three parts include:

  1. “The debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the loans
  2. Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans
  3. The debtor has made good faith efforts to repay the loans.”

Essentially, to prove undue hardship, you’ll need to show that repaying your student loan debts would prevent you from living a healthy, quality life and that your prospects for the future — financially, employment-wise, etc. — are unlikely to improve. Additionally, you’ll need to have made other efforts to tackle your student loans. Pursuing an income-driven repayment plan or forbearance are just a few of these options.

The “Totality of Circumstances” Test

The Totality of Circumstances test is less widely used, though a few states employ it. This one takes a more holistic look at your financial picture, rather than just a few individual factors.

Though it seems like an easier hurdle to overcome at face value, most of the decision falls to the judge and their own experiences in the courtroom. Because of this, if you’re considering discharging your debts through bankruptcy in a state using this test, you’ll probably want to speak with an attorney to gauge your prospects first.

If it seems proving undue hardship by the totality of circumstances is too difficult, see the “Other repayment options” section below for more guidance.

Steps to filing student loan bankruptcy

Bankruptcy, and especially trying to discharge student loans through one, can be a complex and challenging process. Follow this step-by-step guide to stay on track:

  1. Talk to a professional
  2. File for Chapter 7 or Chapter 13 bankruptcy
  3. File an adversary proceeding
  4. Wait to hear your judgment

Step 1: Talk to a professional

An attorney or bankruptcy lawyer can help you better understand student loan bankruptcy laws, build your case, and set you up for success. Consider searching for a pro bono one in your area, as paying high fees for a pricy lawyer could hurt your undue hardship case. Good options here include your local Legal Aid branch, the state bar association, or nearby law schools.

Step 2: File for Chapter 7 or Chapter 13 bankruptcy

Next, you’ll need to file for either Chapter 7 or Chapter 13 bankruptcy. Though both have their perks, Chapter 7 is generally best with student loans, as they can be discharged sooner (meaning less interest paid in the long run). Remember, though, Chapter 7 requires that you fall under a set income threshold or pass a means test, so if you make decent income — more than the median for your area, usually — then it’s probably not an option.

Step 3: File an adversary proceeding

Filing a petition for your adversary proceeding is next. You can do this by yourself technically, but it’s typically best done by an attorney or someone well-versed in the law.

Here’s how the U.S Bankruptcy Court in the Northern District of Florida sums it up: “The laws pertaining to bankruptcy are very complex. Like many lawsuits, an adversary proceeding (AP) can involve complicated factual circumstances and legal questions. Clerk’s Office staff, the judge, the judge’s staff, and the trustee appointed to oversee the bankruptcy case are not permitted to answer legal questions or provide legal advice. It is strongly recommended that you retain legal counsel to represent you in an AP.”

Step 4: Wait to hear your judgment

Once you’ve filed your AP petition, you’ll be summoned to court and will go before the judge. After your case is heard and your evidence presented, you’ll receive judgment.

Your judge can go one of three routes: granting you a partial discharge (meaning some of the loans are canceled), granting you a full discharge (all of them are canceled), or denying your petition to discharge the debts entirely.

Other repayment options for those not eligible for bankruptcy

If you’re struggling financially due to your student loan debt, discharging them through bankruptcy may be an option. In fact, according to a study in the American Bankruptcy Law Journal, about 40% of debtors who attempt to prove undue hardship are successful.

If you fear you’d don’t have evidence to prove a hardship and successfully file for student loan debt bankruptcy, there may be other options you can pursue. These include:

  • Forbearance and deferment: These options let you pause payments due to financial hardship. In some cases, the balance may continue to earn interest, but you won’t have to make any payments for a certain period — usually six months to a year. Learn more: Student loan forbearance & student loan deferment guides
  • Income-driven repayment plans: Federal loans come with several options here, with most requiring payments worth just 10% of your discretionary income. Some will also forgive your entire loan balance after a certain period. Learn more: Income-driven repayment plans
  • Graduated repayment: This is available to federal loan borrowers and allows them to pay a small monthly amount for the first two years. The payment then increases slightly every two years for a 10-year term. This gives you time to build up your income and gradually work up to paying off those loans. Learn more: Graduated repayment plan
  • Extended repayment: Another option for federal loans, this one lets you spread your payments out over 25 years, lowering your payments and making them more manageable.
  • Loan forgiveness: The federal government offers total loan forgiveness in some instances, including for borrowers who go into a public service field, are disabled, or teach in a low-income area. Learn more: Student loan forgiveness programs

If you have the means, you might also consider refinancing your loans into ones with more affordable terms or interest rates.