Student Loans and Bankruptcy

Why Student Loans Are Treated Differently

Unlike credit cards, medical bills, and most other debts, student loans receive special treatment in bankruptcy law. Both federal and private student loans are presumed non-dischargeable unless the borrower can prove that repaying them would cause "undue hardship."

This special protection exists because:

• Student loans are guaranteed by the federal government
• Education creates lasting value (degree) that can't be repossessed
• Congress wanted to prevent strategic bankruptcies right after graduation
• Student loan borrowing increased dramatically over decades

Can Student Loans Ever Be Discharged?

Yes, but it's difficult. Student loans can be discharged in bankruptcy if you can prove "undue hardship" through an adversary proceeding (a lawsuit within your bankruptcy case).

Types of Student Loans Covered

The undue hardship standard applies to:

• Federal student loans: Direct Loans, FFEL Program loans, Perkins Loans, PLUS loans
• Private student loans: Loans from banks and private lenders for educational expenses
• Qualified education loans: Loans used for qualified higher education expenses

The Undue Hardship Test

To discharge student loans, you must file an adversary proceeding and prove "undue hardship." Most courts use the Brunner test, which requires you to prove all three elements:

Brunner Test (Most Common Standard)

1. Poverty: You Cannot Maintain a Minimal Standard of Living

You must show that if forced to repay student loans, you cannot maintain a minimal standard of living for yourself and your dependents.

Evidence includes:

• Monthly income barely covers basic necessities (food, shelter, utilities)
• No discretionary income after essential expenses
• Living below poverty level
• Relying on public assistance

2. Persistence: Your Situation is Likely to Continue

You must show that your financial hardship is likely to persist for most or all of the repayment period.

Evidence includes:

• Permanent disability preventing work
• Chronic medical conditions limiting earning capacity
• Advanced age with limited job prospects
• Lack of job skills or education to improve income
• Maximized earning potential with no room for growth

3. Good Faith: You Made Honest Efforts to Repay

You must show you made good faith efforts to repay the loans before seeking discharge.

Evidence includes:

• Made payments for several years when able
• Attempted to work with lenders on repayment plans
• Applied for income-driven repayment plans
• Pursued loan consolidation or deferment when appropriate
• Did not immediately file bankruptcy after graduation
• Minimized personal expenses and maximized loan payments

Alternative Tests

Some courts use different standards:

Totality of Circumstances Test: A few courts look at all circumstances rather than strictly applying Brunner. This can be more flexible but is used in limited jurisdictions.

Who Might Qualify for Undue Hardship Discharge

While each case is unique, discharge is more likely for borrowers with:

• Severe disabilities: Permanent physical or mental disabilities preventing substantial gainful employment
• Chronic health conditions: Long-term medical issues affecting earning capacity
• Advanced age: Older borrowers with limited income and no realistic prospect of increased earnings
• Failed education: Did not complete degree program and have no improved earning potential
• Very high debt relative to income: Massive student loan debt with very low income and no prospect of improvement
• Long repayment history: Made payments for 10+ years but principal barely decreased due to low income

Recent Developments (2022-2026)

Student loan discharge has become slightly easier due to recent policy changes:

Department of Justice Guidance (November 2022)

The DOJ issued new guidance recommending that government attorneys not oppose undue hardship discharges in cases meeting certain criteria, including:

• Borrower is at or below 225% of poverty level
• Borrower has filed for Chapter 7 or dismissed Chapter 13
• Borrower made good faith effort to maximize income

Department of Education Attestation Form

Some courts now accept a streamlined attestation process for certain borrowers rather than requiring full adversary proceedings. This makes the process faster and less expensive.

What This Means

While discharge is still difficult, these changes mean more borrowers may succeed, especially those with long-term financial hardship, disabilities, or low incomes unlikely to improve.

The Adversary Proceeding Process

To attempt to discharge student loans, you must file an adversary proceeding - essentially a lawsuit within your bankruptcy case.

Steps in an Adversary Proceeding

1. File bankruptcy petition - Chapter 7 or Chapter 13
2. File adversary complaint - Lawsuit against student loan creditors seeking discharge based on undue hardship
3. Serve loan creditors - Officially notify all student loan lenders/servicers
4. Discovery - Exchange financial documents, answer questions, provide evidence
5. Negotiation - Sometimes creditors will negotiate partial discharge or settlement
6. Trial - Present evidence and testimony proving undue hardship
7. Decision - Judge determines whether to discharge all, part, or none of the loans

Costs and Timeline

• Additional attorney fees: $2,000-$5,000+ (in addition to bankruptcy fees)
• Court filing fees: Varies by jurisdiction
• Timeline: 6-18 months depending on court backlog and complexity
• Appeal possible: Either party can appeal the decision

Possible Outcomes

• Full discharge: All student loans eliminated
• Partial discharge: Some loans or portion of total debt discharged
• No discharge: Request denied, loans remain
• Settlement: Creditor agrees to reduced balance or modified terms

How Bankruptcy Helps Even Without Discharge

Even if you can't discharge student loans, bankruptcy can still provide significant relief:

Eliminate Other Debts

Bankruptcy discharges credit cards, medical bills, and other debts, freeing up income to pay student loans.

Chapter 13 Benefits for Student Loans

While student loans aren't discharged in Chapter 13, the bankruptcy can help:

• Stop collection actions: Automatic stay stops wage garnishment and collection calls
• Catch up on arrears: Past-due student loan payments can be included in the plan
• Suspend payments: Current payments may be suspended during the 3-5 year plan
• Lower overall debt: Other debts are reduced or eliminated, making student loans more affordable afterward

Stop Wage Garnishment

If the Department of Education or a private lender is garnishing your wages for defaulted student loans, bankruptcy immediately stops the garnishment through the automatic stay. This provides breathing room to explore repayment options.

Alternatives to Bankruptcy for Student Loans

Before pursuing bankruptcy discharge, explore these alternatives:

Income-Driven Repayment Plans (Federal Loans Only)

Federal student loans offer income-driven repayment (IDR) plans that cap payments at 10-20% of discretionary income:

• SAVE Plan: 5-10% of discretionary income; forgiveness after 20-25 years
• PAYE: 10% of discretionary income; forgiveness after 20 years
• IBR: 10-15% of discretionary income; forgiveness after 20-25 years
• ICR: 20% of discretionary income or fixed over 12 years, whichever is less; forgiveness after 25 years

Advantages: Payments based on income; potential forgiveness; interest subsidy in some plans

Disadvantages: Loan balance may grow due to unpaid interest; forgiveness is taxable income (as of 2026, though this may change)

Public Service Loan Forgiveness (PSLF)

Working for government or non-profit organizations? You may qualify for loan forgiveness after 10 years (120 qualifying payments) of full-time service.

• Must work for qualifying employer (government or 501(c)(3) non-profit)
• Must be on income-driven repayment plan
• Must make 120 qualifying monthly payments
• Forgiveness is tax-free

Total and Permanent Disability Discharge

Federal student loans can be discharged if you're totally and permanently disabled:

• Qualification through Social Security disability determination
• VA disability rating of 100% unemployable
• Physician certification of total and permanent disability

This discharge is available outside of bankruptcy and may be easier to obtain than undue hardship discharge.

Borrower Defense to Repayment

Federal loans may be discharged if your school misled you, engaged in misconduct, or violated certain laws. Recent examples include:

• For-profit schools that made false job placement claims
• Schools that closed while you were enrolled
• Schools that falsified attendance or grades

Loan Rehabilitation and Consolidation

For defaulted loans:

• Rehabilitation: Make 9 on-time payments over 10 months to remove default status
• Consolidation: Combine loans and get out of default, but doesn't reduce balance

Strategic Considerations

Should You Try to Discharge Student Loans?

Consider attempting discharge if:

• You have a severe permanent disability
• You've made good faith efforts to repay for 10+ years
• Your income is at or near poverty level with no prospect of increase
• Income-driven repayment still leaves you unable to afford basic necessities
• You can afford the $3,000-$5,000 in additional legal fees for adversary proceeding

When Bankruptcy Alone (Without Discharge) Makes Sense

File bankruptcy to eliminate other debts even if you know student loans won't be discharged if:

• You have significant credit card, medical, or other dischargeable debt
• Eliminating other debts would free up enough income to manage student loans
• You're facing wage garnishment for student loans and need the automatic stay
• You need to stop collection actions on all debts while you explore long-term solutions

Frequently Asked Questions

What percentage of people successfully discharge student loans in bankruptcy?

Historically, very few people even attempt to discharge student loans in bankruptcy, and success rates have been estimated at less than 1%. However, recent policy changes may improve these odds, especially for severely disabled or permanently low-income borrowers.

Can I discharge private student loans but not federal loans?

Potentially. If you can prove undue hardship for some loans but not others, you might receive partial discharge. Each loan is evaluated separately, though courts often apply the same analysis to all education debt.

Will filing bankruptcy hurt my chances at income-driven repayment?

No. Filing bankruptcy does not affect your eligibility for income-driven repayment plans or loan forgiveness programs. In fact, bankruptcy may lower your income (by eliminating other debt payments), which could lower your IDR payments.

Can I get rid of Parent PLUS loans in bankruptcy?

Parent PLUS loans are subject to the same undue hardship standard as other student loans. They're very difficult to discharge, but parents with severe disabilities, very low income, or other extreme circumstances might succeed.

Should I stop paying student loans before filing bankruptcy?

This depends on your situation. If you're also filing an adversary proceeding, continuing to pay might hurt your "poverty" argument. However, if you're only filing bankruptcy for other debts, keep making student loan payments to avoid default. Consult with an attorney before making this decision.

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