Can You Discharge Student Loan Debts in Bankruptcy?

If you are dealing with the financial burden of student loan debt, you’re not alone. You may even be wondering if you can file for bankruptcy to get rid of federal student loan debt.

With limited exceptions, the answer is “no.” Federally guaranteed student loans are not dischargeable in bankruptcy.

“The bankruptcy code has a specific section on the types of debt that don’t go away in a bankruptcy,” explains bankruptcy lawyer Heather Culp. “It’s a pretty narrow group, but student loans is one of them.”

However, there are other repayment options available for student loan borrowers. In this article, you will find an overview of the most important things to know about student loan debt and bankruptcy.

Bankruptcy Can Discharge Student Loans Only in Very Limited Circumstances

There are very limited circumstances in which student loans can be discharged through bankruptcy. The debtor has to prove that excluding student loans from their bankruptcy will cause them “undue hardship.”

To prove undue hardship, you must satisfy three criteria known as the Brunner test:

1. You can’t maintain a minimal standard of living if you have to repay the student loans
2. Circumstances indicate that your situation won’t change for a significant portion of the loan term
3. You have made a good-faith effort to repay the loans and no other debt relief alternative is adequate to your needs

It’s Very Difficult To Satisfy the Brunner Test for Discharge of Student Loans

The unfortunate reality is that it’s nearly impossible for most borrowers to satisfy the Brunner test, even if they are really struggling with student loan debt.

“One of the things that makes it particularly difficult is that there are a lot of flexible repayment options, particularly for U.S. Department of Education loans,” Culp says. “There’s an income-based repayment plan, and your payment can be as low as $0 if you can’t afford it. And that seems to cut the legs out from under a lot of people’s arguments.”

If a borrower can satisfy the three requirements of the Brunner test, the court may take one of three actions:

1. Discharge all of the student loan debt
2. Do a partial discharge, where a portion of the debt must still be repaid
3. Decline to discharge the debt but establish new student loan terms, such as a lower interest rate or a longer repayment period

How To Prove Undue Hardship in Court

To meet the undue hardship criteria, the debtor’s financial situation must indicate a certainty of hopelessness, not merely a present inability to pay bills. The circumstances often include one or more of the following:

• Debilitating illness
• Permanent disability
• Lack of job skills
• Existence of dependents

Also, the circumstances must be beyond the debtor’s control. The debot cannot willingly put themselves into a position of long-term hardship.

It is often necessary that the bankruptcy filer hire an expert witness to demonstrate the undue hardship the student loan repayment will cause the filer, a significant expense for someone who is struggling financially.

Bankruptcy and Co-Debtors on Student Loans

For borrowers with a co-signer or guarantor on their student loan debt, bankruptcy may relieve pressure on co-debtors.

“There’s a particular provision in the Chapter 13 part of the Bankruptcy Code called the co-debtor stay,” Culp says. “It prohibits the creditor from contacting co-debtors on student loan debt. So that can be a big, big help right there.”

And, if your loan is not a qualified education loan as described by statute, it can be discharged through bankruptcy. Some examples might be loans for a for-profit school that closed while you were a student, or some types of trade schools.

Alternatives if You Don’t Qualify for Discharge

With such strict criteria, not everyone will qualify for a discharge of student loan debt through bankruptcy. However, filing for bankruptcy could still make sense if you have a lot of other unsecured debt as well, such as credit card or medical debt.

Bankruptcy courts will take your student loan obligations into account when reviewing your overall financial situation. Further, the U.S. Department of Education explains that there are several student loan relief options available, including:

• Graduated repayment plans
• Extended repayment plans
• Revised Pay As You Earn Repayment Plan (REPAYE)
• Pay As You Earn Repayment Plan (PAYE)
• Income-Based Repayment Plan (IBR)
• Income-Contingent Repayment Plan (ICR)

Deferment and forbearance are also options. Depending on your financial circumstances, you may be able to get your monthly student loan payments delayed or reduced to a small fraction of the current amount.

“Oftentimes, people who come to see me are working really hard to pay down their credit card debt,” Culp says. “They’re throwing every extra penny at that. And that doesn’t really make any sense, because credit card debt goes away in bankruptcy, and student loan debt does not.”

If you have private student loans and can’t pay them, a private lender might sue you to try to collect. Bankruptcy can stop that process and give struggling borrowers some breathing room, Culp says.

When To Contact a Bankruptcy Lawyer

Often, it’s not just student loans that lead people to contact an attorney. “It’s usually something else that pushes them into calling me for a bankruptcy consultation, and, of course, we wind up talking about the student loans at the same time, because they’re a piece of the puzzle,” says Culp.

The cost of getting help with bankruptcy will vary depending on the type of bankruptcy you’re seeking and the complexity of your case. Most bankruptcy lawyers will do a Chapter 7 bankruptcy for a flat fee. “I think just about the cheapest I’ve seen is probably $900 to $1,200 flat attorney fee, and that’s at the really, really, really low end,” Culp says.

Many struggling borrowers often wonder if the cost is worth it. “Whether it’s a $1,000 attorney fee, a $5,000 attorney fee, a $20,000 attorney fee, it’s my job to help you find the best way out of a bad situation,” Culp says. “And if you wind up finding that your best way out is paying a $3,500 attorney fee to discharge $150,000 worth of credit card debt and medical debt, that’s a good day, all day, every day. That’s a good deal, and it makes sense to do it.”

Seek Legal Advice

If you have questions about student loans and debt relief, contact an experienced bankruptcy lawyer for guidance and support. A bankruptcy attorney will be able to review your specific financial situation and help you determine the best course of action.