Filing for bankruptcy is never ideal, but sometimes having debt discharged is the only way forward. This is especially true if you’ve been struggling for a while financially and are unable to repay your debts while still maintaining a minimal standard of living.

Many people believe that it’s impossible to get student loans discharged in bankruptcy. That’s not the case — though you have to prove paying down the loans is causing you “undue hardship,” historically a complicated process. The U.S. Department of Justice and Department of Education recently announced changes that could make it easier for you to get your student loans discharged through bankruptcy. Here’s what to know.

Key takeaways

  • To get student loans discharged, you’ll need to prove that they cause you “undue hardship.”
  • Borrowers can choose between Chapter 7 and Chapter 13 bankruptcy, but they must file a separate adversary proceeding for student loans.
  • Recent court cases along with new processes established by the Department of Justice suggest that student loan discharge through bankruptcy may become easier in the future.

How to file for bankruptcy on student loans

Declaring bankruptcy on student loans is not easy, and it will affect more than just your college debt. Here are the steps to follow:

  1. Find a lawyer. The first step to filing for bankruptcy with student loans is locating a lawyer who has expertise in this area. It’s important to find an experienced professional, as not every lawyer works with student loan discharge. If you don’t know where to start, services like Upsolve could help you in the process. However, you should know that bankruptcy can cost thousands of dollars. Being able to afford the attorney fees may mean that you’re ineligible for discharge based on undue hardship: Lawyers can argue that if you can pay attorney fees, you can repay your debts.
  2. Seek a free consultation. Some student loan lawyers might offer a free consultation. If so, take advantage of it. An attorney can go over your options and let you know if bankruptcy is a viable option for your situation.
  3. Decide if you will file for Chapter 7 or Chapter 13 bankruptcy. You’ll need to choose between Chapter 7 or Chapter 13 bankruptcy, which have different rules regarding which assets you keep and what you’re required to pay. Your attorney can help you consider your bankruptcy options and determine which is the best fit for your financial situation.
  4. File a separate adversary proceeding to discharge your student loans. This filing is similar to a lawsuit, but it happens in bankruptcy court. During the proceeding, you’ll have to meet the undue hardship standard. According to the U.S. Department of Education, you must be able to “demonstrate that repayment would impose undue hardship on you and your dependents.” Your creditors or representatives of your creditors may also show up at the proceeding to challenge your claims.
  5. Wait on a decision. There are several potential outcomes to an adversary proceeding. The court may decide to grant your petition to discharge all of your student loans. It might also opt to grant a partial discharge of part of your loans, or no discharge at all.

Chapter 7 vs. Chapter 13 bankruptcy

Which type of bankruptcy should you consider? The answer to that question depends on your ability to work and receive a regular income, as well as the outcome you hope to achieve.

The two most common types of bankruptcy for consumers are Chapter 7 and Chapter 13. Here is how they differ.

Chapter 7 Chapter 13
Main features All nonexempt assets will be sold to repay some of the debts you owe You’ll keep your property, but you must repay your debts on an agreed-upon timeline
What assets do you keep? Some personal items and possibly real estate (depending upon the state you live in) Generally all property; your home may be safe from foreclosure
Who qualifies? You must have an average monthly income lower than the median income for your state or pass a means test You must earn a regular income and show an ability to repay your debts
How long does the process take? Typically four to six months for debt discharge Three to five years on a repayment plan
How long does it stay on your credit report? 10 years 7 years

How to prove undue hardship for student loans

While undue hardship can look different for each person, this term is used to describe a situation where it would be practically impossible for you to repay your student loans. Historically, it has been a high threshold for student loan borrowers to meet.

There are three prongs to proving undue hardship:

  1. Undue hardship would describe any situation where someone cannot pay their student loans and pay for a roof over their head or put food on the table. If you racked up significant student loan debt but became incapacitated and unable to work after a car wreck, for example, you could potentially qualify. If you are unable to maintain a minimal standard of living, you could prove that repayment of the student loan is an undue hardship.
  2. Undue hardship also needs to be likely to continue for a significant portion of the loan repayment period, notes the U.S. Department of Education. In other words, a medical student who is drowning in debt cannot file bankruptcy on their loans, have them discharged and then go on to earn a significant income a few years later.
  3. You also have to make a good-faith effort to repay your loan before moving forward with bankruptcy. If you don’t, it’s less likely that you’ll be successful in bankruptcy court.

What happens if the bankruptcy court doesn’t discharge my loans?

Once you move forward with Chapter 7 or Chapter 13 bankruptcy, four possible scenarios might play out. You could see all of your student loans and other debts wiped away completely, your loan could be partially discharged or you could have to repay your loan under better terms, such as with a lower interest rate or monthly payment. 

You may also fail at having the terms of your loans changed at all during bankruptcy proceedings, which is a possibility you should be aware of.

If the courts do not find your claim of undue hardship adequate to qualify for bankruptcy, you may have no choice but to carry on in an effort to repay your loans. 

How Justice Department changes will make student loan bankruptcy easier

For a while now, federal legislators along with the courts have been pushing to change the student loan bankruptcy landscape. Last year, student loan servicer Navient attempted to dismiss a borrower’s case to have student loans eliminated through bankruptcy, but the courts rejected the motion.

There have also been two bills introduced that would also make it easier for borrowers to seek bankruptcy discharge for student loans. The FRESH START Through Bankruptcy Act of 2021 addresses federal student loans, while the Private Student Loan Bankruptcy Fairness Act addresses private student loans.

Luckily, efforts haven’t stopped there. On Nov. 17, 2022, the Departments of Justice and Education announced changes in how student loan discharge will be treated in future bankruptcy cases. 

Under the new guidelines, borrowers seeking student loan discharge will have to submit a form in which they include details about their income and household situation that can attest to their economic hardship. This form will then be evaluated by the Department of Justice in consultation with the Department of Education. The Justice Department will advise the judge on whether to grant full or partial discharge of the loans in question. However, the final decision is up to the bankruptcy judge.

The main goal of this form and review process is to ensure consistency and equity when it comes to how courts handle student loan bankruptcy. That way, borrowers in distress have a fair chance of getting their debt discharged.

“The current undue hardship method of student loan discharge is random, arbitrary and unfair,” said John Rao, staff attorney at the National Consumer Law Center (NCLC), in a statement. “The new guidance has the potential to provide a meaningful avenue for relief but its effectiveness will depend on how it is implemented by the Departments of Education and Justice,” he added.

Possible alternatives to student loan bankruptcy

Filing for bankruptcy can definitely bring some much-needed relief if you’re struggling financially. However, the consequences of filing for bankruptcy are long-lasting, which is why it should be your last resort.

If the main issue at hand is that you’re unable to keep up with your student loan payments, but are okay balancing everything else without them in the picture, make sure you explore the following options before you make a decision.

  • Apply for an income-driven repayment plan. If you only have federal student loans, income-driven repayment plans let you pay a percentage of your discretionary income for 20 to 25 years before forgiving your remaining loan balances. Because your payments will fluctuate with your income, your payments could be much lower than they are now.
  • Look for federal loan forgiveness programs. Public Service Loan Forgiveness is available for individuals willing to work in qualifying public service positions and make payments on an income-driven repayment plan for 10 years. There are also other types of loan forgiveness plans you can explore.
  • Ask for temporary deferment or forbearance. If you need temporary relief from private or federal student loans, look into deferment and forbearance, which let you pause payments on your loans for a limited time. Remember that interest may continue accruing during forbearance, which could worsen your problem.
  • Refinance your student loans. This option won’t work for everyone, but you could refinance your student loans with a private lender that might offer a lower interest rate or a monthly payment that you can afford. But if you refinance federal student loans, you’ll lose access to administrative forbearance options, forgiveness programs and income-driven repayment plans, as you’d be turning your federal loans into private ones.
  • Contact consumer advocacy organizations. If you’re worried about defaulting on your student loans, national organizations can help you apply for repayment options, investigate debt payoff plans or explore loan rehabilitation.

The bottom line

Getting student loans discharged through bankruptcy can be complicated. However, new rules and guidance could make the process easier for borrowers in distress.

That said, filing for bankruptcy can cost thousands of dollars and cause long-term consequences. It shouldn’t be taken lightly. It’s important to exhaust all other options to make your payments more manageable before going down this route.

Michelle Black contributed to a previous version of this article.

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