You’ve probably heard that student loans can’t be discharged in bankruptcy. That’s not entirely true. It is possible to discharge student loan debt in bankruptcy, but it is difficult, and attempts to do it often fail. It requires additional legal proceedings that will almost certainly require the assistance of an experienced attorney. If you are considering trying to discharge student loans through bankruptcy you should understand what’s required and consider other alternatives.
How to Discharge Student Loan Debts in Bankruptcy
Everything about student loans and bankruptcy revolves around two simple words: “undue hardship”. To discharge student loans during bankruptcy you must prove that the payments impose undue hardship on you.
To a debtor struggling to make payments, this may sound very straightforward. Fighting to make payments every month always seems like undue hardship. Bankruptcy courts, however, usually take a very restrictive view of what constitutes undue hardship.
If you wish to include student loans in bankruptcy you will have to add an additional step, called an adversary proceeding, to the usual bankruptcy process. This will almost always require the assistance of an attorney. That can be difficult because if you can afford an attorney you will almost certainly not meet the “undue hardship” standard.
Most bankruptcy courts look at three standards, known as “the Brunner test”, to establish undue hardship:
- Minimum standard of living. Paying your student debts will leave you unable to provide even a minimal standard of living for you and any dependents you may have.
- Certainty of persistence. Evidence has to indicate that there is no realistic possibility of financial recovery.
- Good faith effort. You will have to demonstrate that you have made a good faith effort to pay off the loans.
Courts may also use the “totality of circumstances” test, assessing your overall condition to determine whether an undue hardship exists.
These criteria may be interpreted differently by different judges. It is easier to get student loans discharged in some courts than in others.
If you attended a for-profit college or trade school, you may be able to argue that the school breached a contract or made unfair or deceptive promises. That could negate the debt entirely.
How Difficult is it to Discharge Student Loans in Bankruptcy?
Congress decided in 1976 that federal student loans could not be discharged in bankruptcy except under conditions of “undue hardship”. Private student loans were placed in the same category in 2005. This means that student loans are in the same category as child support, alimony, and criminal fines.
Only 1% of bankruptcy filings attempt to include student loans. Around 40% of those succeed. Most bankruptcy attorneys will not attempt to have student loans discharged unless they are very confident that their client meets the conditions.
Most successful attempts to discharge student loans fall into one of three categories:
- Severe and documented medical problems. Serious medical conditions that do not allow you to work and are unlikely to be resolved are a legitimate reason to include student loans in bankruptcy.
- Extreme economic circumstances. If you are experiencing extreme poverty with no realistic possibility of improvement you may be able to persuade a bankruptcy court to discharge student loans.
- Age. Individuals who are still burdened by student loans in their retirement years may get a favorable decision from a court.
Experienced bankruptcy attorneys state that serious and ongoing medical problems are the most successful basis for an attempt to include student loans in bankruptcy.
What Will Happen if I Try to Discharge Student Loans in Bankruptcy
There are three possible outcomes in an effort to discharge student loans in bankruptcy.
- Full discharge. The court will agree to include your student debts in your bankruptcy and eliminate them.
- Partial Discharge. The court may decide to discharge a portion of your student debt. You’ll still be expected to pay the rest.
- No discharge. If the court decides that your student debts do not pose an undue hardship they will not be included in your bankruptcy and you will be required to pay them.
Your attorney will advise you on how the bankruptcy court in your area is likely to rule on your case. Most attorneys will not advise you to try to include student loans in bankruptcy unless you clearly meet the criteria. Filing an adversary proceeding requires considerable effort and legal expense, so you may not wish to proceed unless there’s a good chance of success.
Alternatives to Including Student Loans in Bankruptcy
The court may refuse to include your student loans in your bankruptcy or your attorney may believe that the chances of success are too low to justify the effort and expense of trying. If that’s the case, consider these alternatives.
- Income-Driven Repayment plans. If you have federal student loans you can apply for a plan that will extend your loan term and limit your payments to a percentage of your income. There are four different plans, and the loan payments may be capped at zero, meaning you don’t have to pay unless your income increases.
- Deferment or forbearance. Deferment allows you to stop making payments for a set time. It’s often used when a borrower is unemployed. If your loan is deferred you may not have to pay the interest accrued over the deferment period. Forbearance is similar but you will have to pay the accrued interest. Federal student loans offer these options and some private loans do as well.
- Loan discharge due to disability. Federal loans and some private loans may be discharged without a bankruptcy proceeding if you are totally and permanently disabled.
- Bankruptcy. Even if a bankruptcy doesn’t discharge your student debts it could free up resources you’re using to pay other debts and allow you to pay your student loans.
Avoid defaulting on student loans, especially federal loans. The federal government offers multiple payment options, but they are not gentle with those who default. The government can garnish your wages, seize your tax refund or Social Security benefits, and place liens on your assets. There is no statute of limitations on federal student loans.
It is not impossible to include student loans bankruptcy, but it is difficult. The criteria are strict and you will have to meet them. Your attorney will be familiar with the standards applied by the bankruptcy court in your area and can tell you if it’s worth trying.
It’s best to avoid bankruptcy if possible. Consider all options for managing student loans and make every effort to pay them before considering bankruptcy. If you do have legitimate reasons, though, you should know that it is not impossible to relieve student debt through bankruptcy. Others have done it and if you meet the criteria you can too.