Can I discharge my student loans by filing for bankruptcy?
UPDATED: February 14, 2020
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It is possible, but difficult, to discharge student loans through bankruptcy. In order to obtain a student loan discharge, the debtor must file a petition called an adversary proceeding. Before allowing a student loan discharge, bankruptcy courts place a higher burden on student loan holders than holders of other forms of debt, requiring that these debtors demonstrate “undue hardship.” Student loan discharge for loans provided by both government and private institutions will require this proof. Prior to 2005, private student loans were easier than government loans to discharge through bankruptcy, but this changed under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). If you have already filed for bankruptcy, but have not yet filed for a determination of hardship, you should be able to do so without paying additional fees.
How to Obtain a Student Loan Discharge by Demonstrating Undue Hardship
Undue hardship is interpreted in different ways by different courts. A common test used by courts to determine hardship is the Brunner test. Under this test the debtor must show that: (1) they are unable to sustain a minimal standard of living if they are forced to continue to make student loan payments; (2) circumstances are such that it is likely that the debtor will be unable to pay the student loans for a significant part of the repayment period, and; (3) the debtor has made a good faith effort to pay the student loans despite difficulty.
Courts will often look to see if the debtor has used income-based repayment plans or tried to work with credit companies in other ways. If you have not tried these alternative strategies, you should be prepared to explain why these alternatives were not right for your situation. Even under a more flexible standard, hardship can be difficult to prove. Many times courts won’t even consider discharging your student loans on undue hardship grounds unless you are physically unable to work. However, there have been cases in which courts have allowed a student loan discharge if the school was found to be fraudulent or the borrower did not benefit from the education.
The BAPCPA Exemption and Student Loans
The BAPCPA covers loans that are used "solely to pay qualified higher education expenses." This means that to qualify for bankruptcy protection, the loan must only include the cost of attendance, minus any grants, scholarships, or other qualified student aid. If your loan exceeds the BAPCPA exemption amount, you may be able to have it discharged through a bankruptcy proceeding without having to show undue hardship. Government issued student loans are unlikely to qualify for this exemption.
Can I Reorganize My Student Loans through Bankruptcy?
If you are unable to obtain a student loan discharge, you may be able to have your loans “reorganized” through Chapter 13 bankruptcy. With reorganization, the court, not the bank, will determine your payments. Under Chapter 13, all of your debts will be consolidated under a payment plan extended over three to five years. While this is only a temporary solution, you may always try to file another petition for hardship once the reorganization period is over.
The debtor should keep in mind that filing for bankruptcy has its own consequences. Bankruptcy will lower your credit for ten years, and filing requires credit counseling and other costs and hurdles. Enlist the help of a qualified bankruptcy lawyer, and make sure you choose a lawyer who has experience discharging student loans through bankruptcy.