Private student loan debt is ridiculous. You make monthly payments for years and the balance does nothing but increase.
You’ve run out of deferments and forbearances. The repayment plans your loan servicer offers you all suck. You can’t refinance. You owe way too much to negotiate a reasonable settlement.
At some point, you wonder if bankruptcy is a solution.
It may just be.
Let’s start with the basics.
Can You File Bankruptcy on Private Student Loans
You may be able to discharge private student loans in bankruptcy if:
- you can prove repaying the loans will cause you and your dependents an undue hardship or
- the private loans are not qualified education loans.
The loans aren’t discharged automatically.
You have to file a lawsuit (adversary proceeding) asking the court to declare your private student loans are discharged.
How to File Student Loan Bankruptcy
There are 3 steps to discharging student loans no matter the type of bankruptcy you file, chapter 7 or chapter 13 bankruptcy.
#1 Hire the Right Lawyer
Sure, with enough research and effort, you can file the bankruptcy paperwork yourself. But filing bankruptcy, by itself, is complicated. And when you add on the process of getting rid of your student loans, the complexity only increases.
The last thing you want to do is to lose you case because of mistakes a seasoned professional would’ve noticed.
Here are a few questions to ask a bankruptcy attorney:
- When was the last time you tried to discharge student loans in bankruptcy?
- What was the result? Were the loans discharged? Did you negotiate a settlement?
- Have you tried to discharge student loans for someone who looks like me (age, income, dependents, marital status, etc.)
👉 Trouble Finding a Lawyer
You may have a hard time finding a bankruptcy lawyer with experience at discharging student loans. Don’t worry. As I said above, discharging student loans is a 2-step process. You can hire a lawyer to handle the first step and then hire a different lawyer (even one from out of town) to handle the second step.
#2 File a Chapter 7 or 13 Bankruptcy
Before you can discharge your student loans, you have to file bankruptcy. Most student loan borrowers will file either a chapter 7 or chapter 13 bankruptcy case.
For student loan purposes, the main difference between the two types of bankruptcy is time.
Chapter 7 bankruptcy cases move quickly. You can get a discharge of your regular consumer debt (credit card debt, medical bills, repossessions, etc.) in about 3 months.
Chapter 13 cases, on the other hand, are much slower. You may have to wait 3 to 5 years to get a discharge.
The difference in time affects when you can try to get rid of your student loans.
With a chapter 7, you can file the lawsuit to get rid of your student loans right away or even after your case is over.
But with a chapter 13, you may have to wait until your case is close to ending, when a discharge is near.
#3 File an Adversary Proceeding
The final step is to file the lawsuit to declare that your student loans are discharegable. loans. In bankruptcy court, that lawsuit is called an adversary proceeding.
When you file the lawsuit, you’ll file a complaint that outlines why you should be able to discharge your student loans.
From there, you’ll send the complaint with a summons to the company holding your student loan. If you don’t know who that company is, you may start the lawsuit by serving your loan servicer. They’ll usually answer quickly with who the right party is that should be sued.
How Long Does a Student Loan Bankruptcy Case Take
There’s no set timeline for how long student loan cases take from start to finish.
There’s usually a lot that happens after the lawsuit is filed and the bank/private lender/holder answers.
Motions are filed. Discovery is requested. Hearings are held.
Basically, bankruptcy proceedings move slow.
Knowing this, I tell clients to expect the case to last about a year.
Sometimes, however, if the student loan borrower is totally and permanently disabled, I expect the lawsuit to end in less than 6 months.
In my experience, private lenders are pretty good about agreeing (stipulating) to a discharge when you can no longer work.
Legal Theories for Student Loan discharge
As I mentioned earlier, you can discharge private student loans in bankruptcy if you can prove either that (a) repaying the loans will cause you and your dependents an undue hardship or (b) the private loans are not qualified education loans.
In many courts, you prove undue hardship by showing you meet all three parts of the Brunner test.
Read Full Article: The Brunner Test Student Loans: How to Prove Undue Hardship
That test, requires you show 3 things:
- You can’t pay back your student loans while maintaining a minimal standard of living based on your current income and expenses.
- You have other circumstances outside of your control that make it likely that your financial situation will continue throughout a significant portion of your loan repayment period.
- You made a good faith effort to repay your student loan debt.
Historically, student loan borrowers have had a difficult time convincing a court they meet one or all of those requirements.
Totality of the Circumstances Test
Depending on where you live, you may have to meet a different test to discharge your student debt. For instance, in Missouri, bankruptcy courts use the totality of the circumstances test.
Thankfully, that appears to be changing.
Earlier this year, a bankruptcy judge in New York allowed a former lawyer to discharge $221 thousand in federal student loans.
Does this case mean everyone should try to discharge their student loans in bankruptcy? Absolutely not.
But it does mean that at least this one judge is willing to look critically at student loan law in bankruptcy.
Qualified Education Loans
To be honest, this is my favorite argument to make that a “private student loan” is dischargeable.
By arguing the private student loan you borrowed isn’t a qualified education loan, you bypass having to prove undue hardship argument.
Instead, you argue that undue hardship doesn’t apply because the private student loan you borrowed isn’t a student loan within the meaning of the Bankruptcy Code.
And because it’s not a student loan under bankruptcy laws, it was discharged with your other debts.
Admittedly, the qualified education loan argument is complicated to understand and argue.
To fully comprehend it, you have to read certain parts of the Bankruptcy Code, the IRS Tax Code, IRS Regulations, and Higher Education Regulations.
I’ve put together a guide you can read to help understand it better.
Boiled down, here’s what that guide says.
Your private student loan isn’t a student loan under the Bankruptcy Code if:
- You borrowed the loan to pay school costs at a school that didn’t receive federal financial aid (federal loans, grants, etc.) or
- The loan was for more than it costs you to go to school (You borrowed $40 thousand, but school only costs $10 thousand)
I’ve used this argument several times to get awesome results for my clients.
The Bottom Line
Discharging private student loans in bankruptcy is hard, but it’s possible.
While filing bankruptcy bankruptcy is scary, it’s a helpful tool to get relief.
Just make sure you give yourself the best shot at winning by hiring hire an experienced professional.