Student loans are difficult, but not impossible, to discharge in bankruptcy. To do so, you must show that payment of the debt “will impose an undue hardship on you and your dependents.”
Courts use different tests to evaluate whether a particular borrower has shown an undue hardship.
The most common test is the Brunner test which requires a showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987). Most, but not all, courts use this test. A lot has changed since this 1987 court decision and some courts have begun to question whether they should use a different standard. For now, all federal courts of appeal except the First and Eighth Circuits have adopted the Brunner test.
If you can successfully prove undue hardship, your student loan will be completely canceled. Filing for bankruptcy also automatically protects you from collection actions on all of your debts, at least until the bankruptcy case is resolved or until the creditor gets permission from the court to start collecting again.
Assuming you can discharge your student loan debt by proving hardship, bankruptcy may be a good option for you. It is a good idea to first consult with a lawyer or other professional to understand other pros and cons associated with bankruptcy. For example, a bankruptcy can remain part of your credit history for ten years. There are costs associated with filing for bankruptcy as well as a number of procedural hurdles. There are also limits on how often you can file for bankruptcy.
How to Discharge Student Loans in Bankruptcy
Whether a student loan is discharged based on hardship is not automatically determined in the bankruptcy process. You must file a petition (called an adversary proceeding) to get a determination. This sample gives you an idea of what your complaint should look like.
If you already filed for bankruptcy, but did not request a determination of undue hardship, you may reopen your bankruptcy case at any time in order to file this proceeding. You should be able to do this without payment of an additional filing fee. Chapter 11 of NCLC’s Student Loan Law publication includes extensive information about discharging student loans in bankruptcy.
UNDUE HARDSHIP EXAMPLES
It is up to the court to decide whether you meet the “undue hardship” standard. Here are a few examples of successful and unsuccessful cases.
Even if you cannot prove undue hardship, you still might want to consider repaying your student loans through a Chapter 13 bankruptcy plan.
A case under chapter 13 is often called “reorganization.” In a chapter 13 case, you submit a plan to repay your creditors over time, usually from future income. These plans allow you to get caught up on mortgages or car loans and other secured debts. If you cannot discharge your student loans based on undue hardship in either a chapter 7 or chapter 13 bankruptcy, there are still certain advantages to filing a chapter 13 bankruptcy. One advantage is that your chapter 13 plan, not your loan holder will determine the size of your student loan payments. You will make these court-determined payments while you are in the Chapter 13 plan, usually for three to five years. You will still owe the remainder of your student loans when you come out of bankruptcy, but you can try at this point to discharge the remainder based on undue hardship. While you are repaying through the bankruptcy court, there will be no collection actions taken against you. You may have other options, depending on how judges decide these cases in your judicial district. For example, some judges allow student loan borrowers to give priority to their student loans during the Chapter 13 plan. You should discuss these options with a bankruptcy attorney.
The Resources section has more information about finding a lawyer to help you. When shopping around for a lawyer, make sure that you let the lawyer know that you want to discharge your student loans in bankruptcy. You should ask a lot of questions to see if the lawyer understands this process. It is not as straightforward as filing a regular Chapter 7 bankruptcy petition. You should assume the lawyer is not knowledgeable in this area if he tells you that student loans cannot be discharged in bankruptcy. The truth is that you can discharge your student loans if you can prove undue hardship. You should always have an opportunity to talk to a lawyer before you pay anything. Make sure you have a clear idea of what the lawyer will do for you and what you will be charged.