When your debt gets too overwhelming, declaring bankruptcy might feel like the only recourse to stay above water — and hundreds of thousands of Americans feel this same burden.
According to the Administrative Office of the U.S. Courts, 767,721 consumers filed for bankruptcy in 2017. Due to the negative impact bankruptcy has on your credit, it should be a last resort when there’s no other financial option.
But compared to discharging most types of debt, discharging a student loan through bankruptcy isn’t as easy or straightforward. Here’s what you need to know if you want to get a student loan bankruptcy discharge.
Can student loans be discharged in bankruptcy?
Does bankruptcy clear student loan debt? Technically, it’s possible. Realistically, it’s rare.
Whether you have federal or private student loans, having the debt removed through bankruptcy is notoriously challenging.
Leslie H. Tayne, a debt resolution attorney at Tayne Law Group, has over 20 years of experience in consumer and business financial debt-related services. When asked how many student loans she’s seen discharged in bankruptcy court, she says it’s so rare that she’s only read about very unique circumstances being successful.
“You may be able to get your student loans discharged if you’re able to prove to a judge that paying your loans causes ‘undue hardship,’” says Tayne. “However, different judges will have different opinions on what constitutes a hardship, and that could depend on the jurisdiction.”
What it takes to discharge student loan debt
Simply filing for bankruptcy — whether that’s chapter 7 or chapter 13 — isn’t the end of your journey to discharge your student loans. In fact, it’s just the start, regardless of whether you have federal or private loans.
After filing for bankruptcy, you’re required to file a separate action called an “adversary proceeding,” which is filed through a bankruptcy court.
The only way to qualify for student loan bankruptcy discharge is by proving that repaying your loans would cause you and your dependents undue hardship. Most courts use the Brunner Test as a way to make this assessment.
The Brunner Test
If the court finds that your situation proves true for each of the following statements, you might have a chance at getting your student loans discharged:
- You wouldn’t be able to maintain a minimum standard of living for you or your dependents if you were forced to repay the loan;
- The hardship would continue for a significant portion of your student loan’s repayment period, and;
- You’ve made every effort to repay your student loans, in good faith, before filing bankruptcy.
The judge is tasked with applying their interpretation of these three assessment prongs and deciding whether your circumstance applies.
If your bankruptcy case doesn’t discharge your student loans, what happens next depends on which type of bankruptcy you filed. Under Chapter 7, you’re required to repay your student loan debt. Under Chapter 13, you’re still required to repay your student loans, but you might be able to arrange an adjustment for the amount you need to pay over a certain period of time.
Why do student loan bankruptcy laws make discharging student debt so hard?
Although current student loan bankruptcy laws make it nearly impossible to discharge student loan debt, this wasn’t always the case.
Before 1976, student loans, like other types of debt, were dischargeable through bankruptcy. Afterward, Congress changed student loan bankruptcy laws, requiring that only loans which have been in repayment for at least five years were eligible for discharge. Later, this minimum repayment term was extended to seven years.
Legislation changed again in 2005, making student loans ineligible for discharge without proof of undue hardship.
“The laws have changed because lawmakers felt students may be taking advantage of the system by getting an expensive degree and then filing bankruptcy to discharge the loans they accumulated,” says Tayne.
For example, if a borrower pursued a costly medical degree and took out multiple student loans in the process, they could strategically file for bankruptcy immediately after graduation. They would then be debt-free, while also having the education and knowledge needed to earn a medical salary that would have been able to repay the loans over time.
This argument, however, was unfounded at the time the Bankruptcy Act was amended to exclude student loans from discharge.
What does the future hold?
In May 2019, the U.S. Senate introduced the “Student Borrower Bankruptcy Relief Act of 2019.” The bill seeks to remove language in the current legislation that prevents student loan bankruptcy discharge. If it passes, student loan debt will be offered the same consideration as other dischargeable debt, without the hardship requirement.
“That still doesn’t resolve the issue, which is the bottom line that the amount borrowed is just so astronomical that it simply isn’t possible to pay back in the short term,” says Tayne. “It significantly impacts income and thus the ability to live reasonably with such high debts at such young ages.
“Simply put, at age 25, you wouldn’t be able to borrow $400k and buy a house with no job or credit history. But you have essentially done that with the student loans. So how could someone be expected to pay it back?”
The fate of the Student Borrower Bankruptcy Relief Act is still an unknown. Until Congress decides on more favorable student loan bankruptcy laws for borrowers, you can try another approach to help manage your loan repayments.
Some options that can help lower your student loan payments include:
- Getting on a different repayment plan: Reach out to your loan servicer to see whether an income-driven repayment plan might make sense for your federal loans. When you’re at the point of bankruptcy, any option to lower your monthly payments could help.
- Seeing if you’re eligible for student loan forgiveness: Depending on your profession, your employer, and your income, your federal student loans might be eligible for forgiveness under programs like Public Service Loan Forgiveness or income-driven repayment plans. Also, explore whether you have access to state loan repayment programs that could forgive a portion of or all of your federal and private loans.
- Refinancing your student loans: Consider whether refinancing your student loans makes sense for your situation. Keep in mind that by refinancing your federal loans with a private lender, you’re losing out on valuable government protections, like student loan forgiveness and access to income-driven repayment plans.
- Apply for deferment or forbearance: For your federal loans, see if you’re eligible to apply for deferment or forbearance. This will help alleviate the weight of student loans by temporarily pausing payment requirements. However, not all private lenders offer this option, so see if you have this flexibility for your private student loans.
If the amount of debt you owe feels like it’s too much to handle, there’s still help available. Contact your lender immediately to share the details of your financial hardship and see what they can do to help you avoid default.