While you can file for bankruptcy to get rid of your student loans, it’s a lot harder than filing for bankruptcy for other types of debt. That’s because you have to prove your student loans cause you undue hardship under current bankruptcy law, adding another step to your case. With no clear legal definition, this can be difficult to prove — you might want to hire a lawyer to help build a case.
Before you decide to file for bankruptcy, check to see if your loans might meet the standards for “undue hardship.” While there’s no legal definition of the term in the US Bankruptcy Code, most courts use the Brunner test to determine if you qualify.
To pass the Brunner test, all three of the following statements must apply to you:
You can’t maintain a minimal standard of living if forced to repay your student loans.
Generally, this means you cut back your personal expenses to the bare essentials for yourself and your dependents. You might also have to show that you’ve made attempts to increase your income.
You can prove that student loan repayments would pose undue hardship for a significant part of your loan term.
You need to be able to show that these financial circumstances will continue indefinitely or for at least several years. If you lost your income due to temporary circumstances — say you broke your foot and can’t work — that likely won’t count.
You’ve made a good faith effort to repay your loans before filing for bankruptcy.
This could mean you’ve tried to change repayment plans, applied for deferment or forbearance when applicable, attempted to increase your income or cut back on unnecessary expenses.
Each court has a different interpretation of the Brunner test, so you might not qualify even if you think you should. For this reason, you might want to bring your case to a lawyer to get their input.
Hiring a lawyer isn’t absolutely necessary to file for bankruptcy, but it can make navigating the process a lot easier — especially with student loans. Look for a bankruptcy attorney that will work pro bono — you likely can’t afford to pay hundreds or thousands of dollars in legal fees.
Before you sign a retainer, you might want to set up a consultation to find out if they think you have a case.
Now that you have a lawyer, it’s time to go to the courts. First, you need to file for Chapter 7 or Chapter 13 bankruptcy.
- Chapter 7 bankruptcy. The court discharges all of your debt, though it seizes some of your assets — like your home, car, valuable jewelry or art — to pay off your lenders. You also must meet certain income requirements, though you can typically qualify if you pass the Brunner test.
- Chapter 13 bankruptcy. You get to keep your assets, but you don’t get your debt totally wiped out. Instead, the court adjusts the terms of your loans and gives you a payment plan of three to five years before your debts can be discharged.
If you hired an attorney, ask them which option is right for you. Depending on which you choose, you might have to attend credit counseling to go over your finances and absolutely make sure that bankruptcy is the best solution.
Already filed for bankruptcy? You can reopen the case to include your student loans.
After you file for bankruptcy, you must also begin an adversary proceeding. You can do this by filing a written complaint that details your case — this is where your attorney can come in handy. After that, the judge will hear your case and come to a decision.
Getting rid of student loans through bankruptcy could get easier
Lawmakers have proposed a bill that would treat student loans like other types of debt in bankruptcy. If passed, the Student Borrower Bankruptcy Relief Act of 2019 would get rid of the undue hardship requirement. Instead, you would follow the standard procedure for filing Chapter 7 or Chapter 13 bankruptcy to get your student loans discharged the same way as other types of debts.
There are three potential outcomes if the judge rules that paying back your student loans would cause you and your dependents undue hardship:
- Total discharge. You won’t have to make any repayments on your student loans and collection agencies are ordered to stop contacting you.
- Partial discharge. The judge reduces the amount you owe but requires you to repay the rest on a modified repayment plan.
- Adjusted terms. Your debt load stays the same, but the judge orders your lenders to adjust your rates or terms to give you repayments you can afford.
If you can’t qualify for discharge due to bankruptcy, contact your servicer as soon as possible. They’re likely aware of the situation and can discuss options you might not have explored, such as a new repayment plan. If you hired an attorney, they might be willing to negotiate with your servicer for you.
While not impossible, getting your student loans discharged through bankruptcy is a lot more complicated than other types of debt. That is, unless the Student Borrower Bankruptcy Relief Act of 2019 passes. In the meantime, you might want to find an attorney who’s willing to take on your case pro bono to help you navigate the process.
Check out our guide to student loans and how bankruptcy affects your finances to learn more.
Before you sign up with a debt relief company
Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And not all companies are transparent about these costs or drawbacks that can negatively affect your credit score. Depending on the company you work with, you might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.
Consider alternatives before signing up with a debt relief company:
- Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
- Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
- Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.
What are my odds of getting my student loans discharged in bankruptcy?
Around 40% of people who attempt to get their student loans discharged through bankruptcy have some part of their loans cancelled, according to a study published in the American Bankruptcy Law Journal. But only 10% of borrowers typically qualify for full discharge. Generally, it depends on several variables, including the judge who sees your case and your state of residence.
Are student loans automatically included if I file for bankruptcy?
No, you’ll also have to submit a complaint to start the adversary proceeding if you want student loans to be included in your bankruptcy case. Most people don’t do this — in fact, only 0.01% of people who owed student loans when they filed for bankruptcy started an adversary proceeding, according to a study published in the American Bankruptcy Law Journal.
How can I get another student loan after I file for bankruptcy?
You won’t qualify for another federal student loan, but it might be possible to qualify for a private student loan. However, you might have to wait for your credit score to recover and for the bankruptcy to come off your credit report, which can take between seven and 10 years.