How Does Bankruptcy Work for Student Loans?

The following is presented for informational purposes only and is not intended as legal advice.

Student loans have been quite present in the news recently given President Biden’s announcement about granting $10,000 to $20,000 in student loan forgiveness. But you may be wondering if you can declare bankruptcy to eliminate more substantial student loan debt. Here’s what you should know about student loans and bankruptcy.

How Bankruptcy Works

When an individual files for bankruptcy, they generally file for Chapter 7 or 13. Both of these options only wipe out certain kinds of debt.

Chapter 7 bankruptcy

Also called liquidation bankruptcy, Chapter 7 can erase eligible unsecured debts like credit card or medical debt. However, a court-appointed trustee can still take your non-exempt property (primary home is exempt) and sell it to repay your creditors with the proceeds.

Chapter 13 bankruptcy

Known as a wage earner’s plan or reorganization bankruptcy, Chapter 13 is for those who have sufficient assets or income to make payments to their creditors. The court won’t sell your property, but you’ll be given a new repayment plan (often 3-to-5-year plans) to continue repaying your creditors. Your eligible remaining debt is discharged at the end of the payment plan terms.

The bankruptcy filing process can take months, and the specific forms required will vary according to your circumstances and type of bankruptcy you’re filing.

What’s most important to understand is that certain kinds of debt usually don’t get discharged, including student loans, child support, alimony, and certain taxes. But there can be exceptions.

Can Student Loans Ever Be Discharged?

In short, yes. There’s a common misunderstanding that student loans can't ever be discharged in bankruptcy, but in fact, sometimes they can. However, it’s harder to discharge compared to other types of debt—so, while it’s not impossible, you’ll need to understand what’s involved.

The key: you must be able to prove that repaying your student loans will cause you “undue” hardship. Normal bankruptcy proceedings require that you make the case for why you need your debts discharged. But if you’re trying to include student loans in your debts to be discharged, you’ll need to participate in an adversary proceeding in bankruptcy court—which is essentially another court proceeding inside your bankruptcy proceeding. This makes everything more complicated.

According to studentaid.gov, you’ll need to be able to prove the following:

• If you’re forced to repay the loan, you would not be able to maintain a minimal standard of living.
• There is evidence this hardship will continue for a significant portion of the loan repayment period.
• You made good faith efforts to repay the loan before filing bankruptcy.

If it’s determined that continuing to pay your student loans would indeed cause you undue hardship, a few things could happen. Your loans might be discharged in full; they might be partially discharged; or you might be required to pay them off in full, but with improved terms like reduced interest.

You may be more successful filing for bankruptcy with private education loans over federal student loans. That’s because federal loans are often eligible for income-driven repayment plans (IDR) that can lower your payment to as little as $0 per month, with the balance forgiven after a certain number of years (usually 20 or 25). Private student loans aren’t eligible for these IDR plans, and so they might be considered for bankruptcy.

No matter what, the court will expect you to exhaust all possibilities before it agrees to a discharge of any kind.

It’s also worth noting that there’s no such thing as “student loan bankruptcy” as a standalone action. If you’re attempting to file bankruptcy on only student loans (with no other debts included), you’re very unlikely to succeed.

Explore Your Repayment Options with Student Loans

If you have federal student loans weighing you down, make sure you’ve explored all your repayment plan options. It may be that an IDR plan or Public Service Loan Forgiveness allows you to make affordable payments without filing for bankruptcy.

If you are experiencing short-term financial hardship, you can explore forbearance or deferment options for your federal loans to avoid delinquency. Keep in mind, payments on federal student loans are still paused because of the Covid-19 pandemic, and they don’t begin again until January 2023.

If you do decide to move forward with filing for bankruptcy, make sure you work with a qualified attorney. You can do it alone, but it’s a complicated process—especially if you’re trying to include student loans.

The Downsides of Filing Bankruptcy on Student Loans

The big negative is that filing for bankruptcy costs money. Attorney fees and court filing fees add up. In fact, the court might even consider your ability to pay for a bankruptcy attorney as evidence that you can repay your debts. Make sure you’ve exhausted all your other options before filing for bankruptcy.

And remember, depending on the type of bankruptcy you file, a court-appointed trustee may be tasked with selling off your non-essential property to help repay your creditors. You’ll have to decide if losing that property is worth it to you.

If you’re struggling with student loan payments and need help exploring a better repayment plan, we offer student loan counseling. If you’re not eligible for bankruptcy, we can help you build a balanced budget and start paying down your unsecured debts with a debt management plan. We’re here to help.