Filing for Student Loan Bankruptcy: What You Need to Know

Student loans can be discharged when filing for bankruptcy, but to do so, the debtor is required to prove continued payments would cause undue hardship. Proving undue hardship is often difficult and may require the help of a bankruptcy lawyer. Consumers should try to exhaust every option before filing bankruptcy, however, as there can be some long-term consequences to filing bankruptcy.

Can Student Loans be Discharged Through Bankruptcy?

Student loans can be discharged through bankruptcy, but the process to do is quite difficult. By default all student loans are not automatically discharged when filing for bankruptcy. In 2005, the U.S. bankruptcy code underwent changes that prevented any student loan, federal or private, to be discharged unless you take the extra step and prove that you would experience undue hardship if you were to pay off your student loans. If you are able to prove undue hardship in court, all student loans will be canceled.

What happens if you co-signed a student loan? If you co-signed a student loan and would like to discharge those loans as you apply for bankruptcy, the same principle of proving undue hardship will still apply. Keep in mind that you as the co-signer will have to prove undue hardship in court and not the student for whom you co-signed.

How to Prove Undue Hardship for Student Loans?

The term “undue hardship” isn’t centrally defined, so individual courts and judges interpret this differently. Instead, most courts leverage the Brunner test as a filter to determine if borrowers experience undue hardship. The United States Department of Education defines the Brunner test in three points:

  • “[The borrower] cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for himself or herself and any dependents if forced to repay the loans
  • "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
  • "[The borrower] has made good faith efforts to repay the loans.”

Another much less common decision-making framework courts use is the Totality of the Circumstances test. Through this, the court examines:

  • “The debtor’s past, present and likely future financial resources
  • “His or her reasonably necessary living expenses
  • “Any other relevant facts and circumstances”

The Brunner Test stems from Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987). As much has changed between then and now, most courts and judges question the relevance of continuing to use such a dated framework. Additionally, the Department of Education did make the pledge in February 2018 to put more formal parameters around the definition of “undue hardship.” Having a centralized definition of undue hardship should make it significantly easier for borrowers to know when they can qualify to have their student loan debt discharged through bankruptcy.

Examples of Proving Undue Hardship in Court

Determining undue hardship is done at the court level right now, so it’s tough to establish a single standard example where undue hardship is proven. However, here is a list of a few scenarios where undue hardship was proven or denied:

  • One case where undue hardship was proven involved a debtor with a number of mental health issues, which prevented her from keeping stable employment. Her daily expenses were deemed to be acceptable and appropriate by the court and the court also found that her expenses exceeded her income. Link to full court case.

  • In another case, a lawyer filed for her loans to be discharged while filing for bankruptcy. As shown in the case briefing, her monthly expenditures included things like birthday gifts, holiday shopping, concert tickets, etc. Despite having sickle cell anemia, there was limited evidence that pointed to the disease affecting her ability to work and generate income. The court denied her appeal and she failed to pass the Brunner test. Link to full court case.

  • Another lawyer based his claim for student loan discharge on the fact that his expenses were greater than his income. However, the debtor also did admit that he could repay the loans and maintain a minimal standard of living, no circumstances affect his ability to repay the loans and that he hadn’t yet made any payments on the loans. The court found that he failed to meet all three conditions of the Brenner test. Link to full court case.

How to File for Student Loan Bankruptcy

Once you’ve made the decision that you absolutely need to file for bankruptcy, you should keep a few things in mind:

1) Filing for bankruptcy can cost up to several thousand dollars.

2) You’ll likely need a seasoned bankruptcy lawyer with experience in this space and in your state. There are pro-bono lawyers who are willing to help. If you can afford a lawyer, you likely won’t be able to prove undue hardship. The Legal Services Corp. is a useful tool to find a lawyer. The Massachusetts Bar Association provides free legal assistance through its Student Loan Bankruptcy Assistance Project for those living in the state. Please contact your local county clerk through the links provided below for help in finding legal assistance.

Local Contacts for Legal Assistance

3.) You’ll have to file for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy means you must prove you have little to no disposable income to pay off your debts. Most unsecured debt, debt that isn’t tied a physical property like a car or house, may be wiped including student loans. Filing for this can take anywhere from three to five months. Chapter 13 bankruptcy means you must prove you have some income to pay off your debts. Your debt will be restructured, and your student loans may be eligible to be restructured but not discharged. So, if you cannot prove undue hardship while filing Chapter 7 bankruptcy, a viable option is to still pursue a Chapter 13 and have your loans be restructured. This means your payment total can change or your interest rate could be lowered. The repayment period can be anywhere from three to five years.

4.) Finally, you need to submit an adversary proceeding. This is the formal document or complaint that needs to be submitted in court to have your student loan discharge even be considered. If you’ve already filed for bankruptcy, you can reopen your bankruptcy case and have the adversary proceeding be filed. Here’s a link to get you started.

Consequences to Filing for Bankruptcy

Filing for bankruptcy can have serious long-term consequences depending on the type of bankruptcy you file for. No matter what kind of bankruptcy you file, there will be associated fees and costs simply for filing. There will also be the added cost of the bankruptcy lawyer should you decide to hire one. Beyond that, there are credit report implications as well. Chapter 7 bankruptcy filings stay on your report for up 10 years after the filing date. Chapter 13 bankruptcy filings stay on your report for up to seven years after the filing date. However, in both scenarios your credit score will be affected long after your bankruptcies are discharged.

If you do manage to have the loan discharged, there may be also be adverse tax implications. The amount discharged is reported to the IRS as debt income of the borrower that is canceled.

Alternative Options: How to Get Help With Your Student Loan Payments

Exhausting all of your options before filing for bankruptcy is crucial. Thankfully, there are a number of options to consider in getting help with your student loan payments.

Federal LoansPrivate Loans
Income-Driven Repayment Plans: These allow for you to refinance your loan payments based on your income and family sizeYou can always ask your loan provider for a temporarily reduced monthly payment or for a lower interest rate.
Public Service Loan Forgiveness: After you’ve made 120 monthly payments under a qualifying repayment plan, you may be eligible to have the rest of your loans be forgiven provided you’re working for an eligible employer.There are several private loan forgiveness programs out there for very niche circumstances. More info on them can be found here.

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