Updated: 2021-01-04 by
Getting rid of student loans in bankruptcy is difficult -- but it’s not always impossible. To succeed, you must convince the court that repaying your student loans would cause you "undue hardship."
Bankruptcy: A Brief Overview
You probably already know that bankruptcy is a court procedure you can use to get your debts erased or reduced. But you may not know there are two different kinds of bankruptcy proceedings.
Liquidation (Chapter 7) bankruptcy. Chapter 7 is the most common type of bankruptcy. When you file for Chapter 7, you may have to surrender some of your property to pay creditors, but the end result is that most of your debt will be completely wiped out. But student loans are a big exception to this rule; you must file additional paperwork and meet a high standard to discharge your student loans in a Chapter 7 case.
Reorganization (Chapter 13) bankruptcy. When you file for Chapter 13 bankruptcy, you get to keep all of your property, but you must partially or fully repay your debts over a period of time. (There are other kinds of reorganization bankruptcy -- Chapter 11 for businesses or very wealthy individuals, and Chapter 12 for family farmers -- but Chapter 13 is by far the most common type for consumers.) You won’t be able to get rid of your student loans in a Chapter 13 case, but you may be able to relieve some short-term pressure. (See “How Chapter 13 Bankruptcy Can Help With Student Loans,” below.)
What Is Undue Hardship?
The U.S. Bankruptcy code doesn’t define undue hardship. That means courts use a variety of tests and factors to decide whether you qualify. These factors often include:
Poverty. If you can’t pay your loans and maintain a “minimal” standard of living for yourself and your dependents, you may meet this standard. The court will base its decision on your current income and expenses, but may also consider factors such as your potential for employment and income, education, marketable skills, health, and family support obligations.
Persistence. To meet this standard, you must show that the condition of poverty will continue for the life of your loan.
Good faith. You’ll have to show that you have made a good faith effort to repay your loans but that circumstances -– such as illness, injury, or a long-term lack of employment options -- have made repayment impossible.
Policy. Some courts may look to see whether you filed for bankruptcy for reasons other than simply getting rid of your student loans. Others may want to see that you haven’t made financial gains due to the education you got from the loans.
The first three factors are part of what’s called the Brunner test, which is used by many courts to decide whether to discharge student loans; you’ll probably read and hear more about that test as you investigate whether bankruptcy is the best option for you. But not all courts use the Brunner test. If you want to find out the factors most commonly considered by courts in your area, talk to a qualified student loan lawyer.
Undue Hardship Examples: Success and Failure
Undue hardship is a hard standard to meet. The following articles contain examples of folks who have attempted it. These examples may help you assess your own situation, but to get a solid overview of your chances, you should consult a good lawyer (see below).
Student Loan Bankruptcy: Undue Hardship Examples (Student Loan Borrower Assistance)
You Can Get Student Loans Forgiven in Bankruptcy, But It’s Far From Easy (Bloomberg Business Week)
Five Things Student Loan Lawyers Ask Borrowers Who File For Bankruptcy (The Wall Street Journal)
How Student Loans Are Handled in Bankruptcy
Student loans aren’t automatically included in your bankruptcy case. If you want the court to discharge them, you’ll have to file a separate document, called a “Complaint to Determine Dischargeability.” This begins a formal lawsuit as part of your bankruptcy proceeding. In this lawsuit, you’ll have to prove that paying your loans will result in undue hardship for you.
If you have private student loans, carefully read the fine print before you file for bankruptcy. Some private loans have what's called a "universal default clause." That means that if you file for bankruptcy -- even if only for debts other than your student loans -- any loans subject to universal default will be immediately due in full.
How Chapter 13 Bankruptcy May Help With Student Loans
If you’re unable to discharge your student loans in Chapter 7, you may get some relief from a Chapter 13 filing. Chapter 13 bankruptcy may allow you to delay or reduce your payments for up to five years. For more details about this option, see Student Loans in Chapter 13 Bankruptcy on Nolo.com.
When to Get a Lawyer’s Help
You may be able to handle an undue hardship proceeding on your own, but most people find it stressful and even overwhelming to face an adversarial situation in which they are required to prove their own weaknesses. A good lawyer will understand what’s involved in filing a student loan discharge petition and should be able to give you an idea of whether your case is likely to succeed.
Even if you’re handling the rest of your bankruptcy proceeding without a lawyer, you may want to hire a qualified student loan attorney to handle just the student loan portion of your case.
For tips on finding a lawyer, see How to Find a Student Loan Lawyer in Idaho.
Don’t forget to thoroughly investigate deferment or forbearance options that could get you payment relief without a bankruptcy filing.
For an overview of ways to postpone or reduce your student loan payments outside of bankruptcy, see Avoiding Student Loan Default.