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Part of the Series How to Pay Off Your Student LoansWhat You Need to Know
Ways to Pay Off Loans
Loans Out of Control?
To file for student loan bankruptcy, you will first need to file for Chapter 7 or Chapter 13 bankruptcy. You will then need to file an adversary proceeding (AP) to have your student loans considered for discharge.
Essentially, you must prove that repayment of the loan would cause undue hardship.
Student loan payments resumed in Oct. 2023 after a three-year pause granted by COVID-19 relief legislation. If you cannot afford to pay, you may be eligible to lower your monthly payments to a level you can afford through the SAVE program. Loan forgiveness is available for some public service workers, non-profit employees, and disabled people.
You can get student loans discharged in some cases, but the process is more complex than it is with other types of debt. Filing for student loan bankruptcy does not guarantee that your student loan will be discharged.
First, you must file for bankruptcy under Chapter 7 or Chapter 13. Then, you'll need to take an additional step of filing an adversary proceeding. This is essentially a lawsuit related to a bankruptcy case that is filed in the same court.
Falling behind on your payments can have a significant negative financial impact on your financial life, including lowering your credit score. If you're considering failing to make payments and filing for student loan bankruptcy, weigh the pros and cons.
Filing for either Chapter 7 or Chapter 13 bankruptcy requires completing extensive paperwork and disclosing your assets, income, debts, and expenses. The bankruptcy court will assign an impartial trustee to meet with your creditors to confirm your debts. You must also undergo credit counseling.
In a Chapter 7 bankruptcy, or liquidation, the trustee will sell off your nonexempt assets. Exempt assets vary by state but may include your home, vehicles, and some other possessions. The trustee uses the proceeds to pay your creditors as much of your debt as possible, and the court discharges the rest.
To file Chapter 7, you must not have had another Chapter 7 bankruptcy discharged in the past eight years. Additionally, your current monthly income must fall below the state median income or you must pass a means test.
Certain debts cannot be discharged, such as taxes, alimony, and child support. Once your case is complete, you can file for student loan discharge.
Many people turn to Chapter 13 bankruptcy, or reorganization, when they can’t pass the Chapter 7 means test. They can also file if they don’t want to lose their home to foreclosure.
Chapter 13 entails creating a repayment plan that uses up to 100% of a debtor’s disposable income to repay creditors within three to five years. Repayment is supervised by the trustee, who collects a monthly payment from the debtor and distributes it to the creditors as outlined in the repayment plan.
The bankruptcy court will determine your new monthly debt payments, including your new student loan payment.
Before filing for bankruptcy, consider:
Bankruptcy remains on your credit history for up to 10 years. Your credit score will likely decline significantly after filing for bankruptcy.
With student loans, you must take the additional step of filing an adversary proceeding in a bankruptcy filing. The proceeding determines whether your debt should be discharged.
The adversary proceeding paperwork was recently simplified by a Nov. 2022 action. Previously, establishing undue hardship was complicated, time-consuming, and often easily rejected. The new process condenses the filing into 15 pages that establish the debtor's current and future economic state and how paying the loans would impact their life. Since its reformation, more than 99% of borrowers were granted at least partial discharge of their student loan debts.
Student loans have stricter requirements for discharge, which are described in section 523(a)(8) of the U.S. bankruptcy code.
If you file for Chapter 7, you can file the adversary proceeding right after filing your bankruptcy case. If you've already gone through Chapter 7 bankruptcy and your case has been closed, you may still be able to file an adversary proceeding to get your student loans discharged, depending on the state where you live.
If your Chapter 7 case is already closed, you must first move to reopen your bankruptcy case. This is procedural and does not restart the bankruptcy or eliminate the discharge you may already have received for your debt.
In a Chapter 13 bankruptcy, when you can file an adversary proceeding depends on the bankruptcy court rules in your state.
Regardless of when you file, your student loan nightmare will not be over if you win the adversary proceeding. You must wait until you've completed the necessary Chapter 13 plan payments and earned your discharge order for your other debts before your student loans will be discharged.
If you are allowed to file the adversary proceeding early, you might get the proceeding over with sooner and obtain a decision on your student loans. The table below compares Chapter 7 and Chapter 13 bankruptcy.
| Comparing Bankruptcy Options | ||
|---|---|---|
| Chapter 7 | Chapter 13 | |
| Who can file | Current monthly income must fall below the state median or you must pass a means test | Must have enough disposable income to make debt payments over three to five years; total secured and unsecured debt must not exceed $2,750,000 |
| Relief available | Collection activity stops; all debts are wiped out except those the court deems nondischargeable and those that are never dischargeable, such as taxes and child support | Collection activity stops; can stop foreclosure and give you more time to catch up on mortgage payments; remaining balance on unsecured debts discharged after completing repayment plan on priority and secured debts |
| Timeframe for basic bankruptcy proceeding | As little as a few months | Three to five years |
| Timeframe for possible student loan discharge | As little as a few months | Three to five years |
| Cost | Court filing fees + attorney fees + assets you're required to give up | Court filing fees + attorney fees + assets you're required to give up |
| Effect on credit | Can stay on credit report for up to 10 years | Seven years after discharge; some creditors may view Chapter 13 more favorably than Chapter 7 |
| Assets you get to keep | Varies by state | Varies by state |
To have your student loans discharged, you must demonstrate that not having them discharged would cause you to experience undue hardship and you must meet specific conditions.
Your student loan creditors—which may include lenders, servicers, and collection agencies, depending on the types of loans you have and how far behind you are on payments—must also meet specific conditions.
Most states use the Brunner test to determine what constitutes undue hardship. Essentially, the test assesses a person's current financial situation, their foreseeable future situation, and whether they have made a good faith effort to repay their loans.
A few states use the totality of the circumstances test. This doesn't consider whether you’ve made a good-faith effort to repay your loans, such as consistent attempts to obtain employment, maximize income, and minimize expenses.
A court might agree that repaying your loans would be an undue hardship if:
A "minimal standard of living" is open to interpretation by the courts, but it may mean;
The common thread in these examples is that your situation is unlikely to improve in a way that would allow you to repay your debt. In addition, your expenses, which the bankruptcy court will scrutinize, should include only reasonably priced necessities, not luxuries or nonessential purchases like restaurant meals, brand-name clothing, vacations, and even giving money to your independent adult child.
Your student loan holder may choose not to oppose your petition to have your loans discharged in bankruptcy court if it believes your circumstances constitute undue hardship or simply to avoid the cost of litigation.
For federal loans, the Department of Education allows a loan holder to accept an undue hardship claim if the costs to pursue the litigation exceed one-third of the total amount owed on the loan, including principal, interest, and collection costs. Private student lenders are likely to apply similar logic.
If you plan to claim undue hardship for federal student loan repayment based on physical or mental impairment, you may not need to go to the bankruptcy court. You may qualify for automatic discharge under Total and Permanent Disability Discharge.
Other circumstances where you might avoid bankruptcy court and apply for administrative discharge are death, a closed school, a false certification, an unpaid refund, and borrower defense to repayment.
Forbearance, deferment, and loan rehabilitation are the other options for managing difficult federal student loan payments.
A much wider plan to cancel federal student loan debt held by millions of borrowers was struck down by the U.S. Supreme Court on June 30, 2023.
In response to the Supreme Court's ruling, Biden announced key changes to federal student loan administration that open up the prospect of relief for many:
It's possible, but there's no guarantee. To do so, you must file an adversary proceeding, which includes a standardized filing establishing need and undue hardship. Once that is filed, you may receive partial or full forgiveness. Alternatively, your petition may be denied, and you may be liable for your current loans plus court fees.
If your loans are federal, not private, consider applying for relief through the SAVE plan. The application takes about 10 minutes and can drastically reduce your monthly payments, even to $0 per month.
If you're overwhelmed by your bills, whether student loans or other debts, consider consulting a financial advisor to review your alternatives.
The easiest way to get rid of your student loans is to pay them off.
There are various programs and resources that can help you manage a federal student loan debt burden.
If your student loans are from a private lender such as a bank, contact the lender and ask for help.
Student loans can be discharged as part of a bankruptcy proceeding via an adversary proceeding. The process requires a 15-page filing establishing current and future finances, and inability to pay. However, any bankruptcy will do long-lasting harm to your credit score.
The SAVE program offers a path to a discharge of the balance of some student loans after a substantial history of on-time payments. The length of time for those payments varies.
Going through the bankruptcy process doesn’t guarantee a specific result. The bankruptcy court could agree that repaying your student loans would cause undue hardship, and either partially or fully discharge your loans. Or, you may still have to repay what you owe, plus collection costs, the additional accrued interest, court fees, and attorney fees. However, with a new streamlined process for substantiating undue hardship, more people are finding debt relief for student loans through bankruptcy.
Before you file, weigh the pros and cons of bankruptcy, including its potential outcomes and impact on your credit score. Meanwhile, explore other alternatives for renegotiating the terms of your student loans with the federal government or your private lender.
Article SourcesWhat You Need to Know
Ways to Pay Off Loans
Loans Out of Control?
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Student loan forgiveness is a release from having to repay the borrowed sum, in full or in part. There are currently several ways to attain student loan forgiveness for federal student loans.
A direct consolidation loan is a type of direct loan that combines two or more federal education loans into a single loan.
If you have federal student loans, you have several repayment options. An IDR plan allows you to make payments based on your income and family size, ensuring you pay what you can afford.
The Saving on a Valuable Education (SAVE) plan is an income-driven repayment (IDR) plan introduced by the Biden Administration that replaces the Revised Pay As You Earn (REPAYE) plan.
A PLUS loan is a federal loan for higher education, available to parents of undergraduates as well as to graduate and professional students.
From 1958–2017, Perkins loans provided low-interest loans to undergraduate and graduate students with exceptional financial needs.
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