Book cover for guide to student loan bankruptcy.

How to File Bankruptcy On Student Loans: A Complete Guide

May 21, 2020

Has someone told you that you can’t file bankruptcy on student loans? They’re wrong. You can file bankruptcy on both a private student loan or a federal student loan, but it’s hard to get rid of them. To discharge your student loan debt, you have to first file bankruptcy. Next, you have to file an adversary proceeding to discharge your student loans as an undue hardship.

You can file the adversary before your bankruptcy case closes or a short-while after the bankruptcy court closes your case.

#1 What Happens to Student Loans When You File Bankruptcy

When you file a chapter 7 or chapter 13 bankruptcy, you’ll list your student loans and other debts (medical bills, credit card debt, car loans, etc.) in your bankruptcy paperwork.

At the end of your case, you’ll get a bankruptcy discharge order for most but not all your debts. You’ll remain responsible for your student loans.

This is because student loans aren’t ordinarily dischargeable in bankruptcy; you have to take another step to discharge them.

Co-Signers and Student Loan Bankruptcy

For the most part, your cosigner isn’t affected by your bankruptcy filing. The only issue may come up with their credit report. If the student loan is listed on their credit report, their report may show that the loan is in bankruptcy. Does that affect their score? I’m not sure.

What’s that step? You have to file a lawsuit (adversary proceeding) to prove that being forced to repay your student loans will cause you and your dependents an undue hardship.

#2 What Happens to Student Loans in Chapter 7 Bankruptcy?

The only thing that happens to your student loans in chapter 7 bankruptcy proceedings is that they go into a deferment/forbearance.

They’ll stay in that deferment/forbearance until your case ends.

Once your case is over and you get a discharge, your student loans will typically pick up where you left off. So if you were in an income-driven repayment plan, you’ll start making payments again. And if you were in default, you’ll go back to being in default.

Click here to learn What happens to student loan debt in a chapter 7 bankruptcy.

#3 What Happens to Student Loan Debt in Chapter 13

In a chapter 13 bankruptcy, you have to make monthly payments to the trustee to repay your creditors. The trustee takes that money and distributes it first to your secured creditors (home, car, etc.) then to priority unsecured creditors (taxes, government debts, etc.) and then to nonpriority unsecured creditors (credit cards, medical bills etc.).

Student loans are a nonpriority unsecured debt. Because of that, many people will never make a payment on their student loans in chapter 13. Almost all their money will go to paying their mortgage, car note, child support, and tax debt.

Two bad things happen to student loan debt in bankruptcy.

First, because you likely won’t be making your monthly student loan payments, you won’t get credit towards loan forgiveness programs. So if you’re pursuing loan forgiveness under the Public Serivce Loan Forgiveness program, you’d want to make sure your chapter 13 bankruptcy plan calls for your loan payments to be made to your loan servicer.

Interest keeps growing on the student loan, however.

As a result, depending on your interest rate, you may leave bankruptcy owing a lot more on your student loans than when you started.

Click here to learn What happens to student loans in chapter 13 bankruptcy.

#4 Both Chapter 7 and Chapter 13 Bankruptcy stop a student loan garnishment

If your wages are being garnished for defaulted student loans, filing bankruptcy will stop the garnishment immediately.

When you open a bankruptcy case, you trigger a law that prevents collection activities against you. That law is called the automatic stay.

Click here to learn Will bankruptcy stop student loan wage garnishment?

#5 Why Can’t Student Loans Be Discharged in Bankruptcy

People who say student loans can’t be discharged in bankruptcy are wrong. Student loans can be discharged in bankruptcy. It’s just hard to do.

In the 1970s, Congress changed bankruptcy law to make federal loans nondischargeable in bankruptcy absent undue hardship. Thirty years later, Congress changed the Bankruptcy Code again to make some private loans nondischargeable absent undue hardship.

You can discharge your student debt if you can show that paying back your loans will cause you or your dependents an undue hardship.

Click here to read the History of the Nondischargeability of Student Loans in Bankruptcy.

#6 What is Undue Hardship for Student Debt

There is no one definition for undue hardship for student loans. Courts use different tests to evaluate whether the student loan borrower has an undue hardship. The two most common tests to evaluate undue hardship are:

  1.  The Brunner Test.
  2.  The Totality of the Circumstances Test.

The Brunner test looks at 3 things:

  1.  Can you pay your student loans and maintain a minimal standard of living with your current income?
  2.  Is your financial situation likely to stay the same for a significant portion of the repayment period?
  3.  ​Have you made a good faith effort to repay your student loans?

Click here to read .

The totality of the circumstances test looks at:

  •  your past, present, and reasonably reliable future financial resources;
  •  your reasonable and necessary living expenses; and.
  •  other relevant facts and additional circumstances.

While each test looks at different factors, there basically trying to answer the same question:

Can you maintain a minimal standard of living for you and your dependents while repaying your student loan debt?

Click here to read The History of the Brunner Test.

#7 How to Prove Undue Hardship for Student Loans

Just like there’s no one definition of “undue hardship”, there’s no exact way to prove undue hardship to discharge student loans.

What’s undue hardship in one court, is ordinary hardship in another court.

For instance, New York resident Kevin Rosenberg, a single, middle-aged man with a law degree and no disabilities, was able to discharge $221,385 in federal student loans.

Judge Cecilia Morris grants undue hardship discharge for Kevin Rosenberg student loans.

But Texas resident Stephen Manley, a single, middle-aged man with no disabilities, who attended law school, was unable to discharge $200 thousand in federal student loans.

Denial of undue hardship discharge for Stephen Manley in Texas.

What’s the difference?

Both bankruptcy courts used the same test, the Brunner test. But came to different conclusions.

Why? Who knows. Different bankruptcy proceedings. Different judges. Different final results.

#8 Factors I Look at to Evaluate Undue Hardship

When borrowers look to hire me as their student loan lawyer in bankruptcy, here are the factors I look to evaluate their chances at getting a hardship discharge:

  • Their age (the older, the better).
  • Their marital status (single is better).
  • Their income (the lower, the better).
  • How many children they have (the more, the better).
  • Whether they or their children have documented medical issues (the sicker, the better).
  • How many jobs they’ve applied for in the past 5 years (the more, the better).
  • Whether they work full-time or part-time (full-time is better).
  • The assets they have (the fewer, the better).
  • Their current financial situation (the worst, the better).
  • Their savings/retirement balances (the lower, the better).
  • The number of degrees they have (the fewer, the better).
  • Their total outstanding student loan debt (the higher, the better).
  • Their monthly student loan payment (the higher, the better).
  • How long it’s been since they borrowed a student loan (the longer, the better).
  • How much they’ve paid towards their student loans (the more, the better).

Are these factors conclusive of undue hardship? Absolutely not.

But they do help me compare their facts against facts from past student loan bankruptcy cases. And with that comparison, I’m able to better estimate their chances of discharging student loans in bankruptcy.

#9 Can you file bankruptcy on private student loans?

You can file bankruptcy on private student loans.

In fact, in some instances, it may be easier to discharge a private loan in bankruptcy than it is to discharge a federal student loan.

As I mentioned above, to discharge federal student loans, you have to prove that paying them back will cause you undue hardship. That’s hard to do when the government offers a monthly payment based on your income.

Click here to learn How to Discharge Federal Student Loans in Bankruptcy.

To discharge private student loans, you may be able to get rid of them by showing that:

  1. They weren’t made under a program funded by a nonprofit; and.
  2. They aren’t qualified education loans.

Showing both of those things can be complicated. You have to really understand the law to get it right.

Click here to learn How to Discharge Private Student Loans in Bankruptcy.

#10 How to File Bankruptcy to Discharge Student Loans

You have to do two things to file bankruptcy on student loans.

First, you have to file for bankruptcy. It doesn’t matter what type of bankruptcy you file. A chapter 7 or chapter 13 bankruptcy case will both work.

Second, you have to file a lawsuit asking the court to grant you a student loan discharge.

Here are three tools to help you seek bankruptcy relief for your student loan debt:

  1. How to file an adversary proceeding in bankruptcy court to get rid of student loan debt
  2. Sample adversary complaint to discharge federal student loans in bankruptcy
  3. Sample adversary complaint to discharge private student loans in bankruptcy

So you know, you can hire the same bankruptcy attorney to do both things. But you may have trouble finding a bankruptcy lawyer that knows how to get rid of student loans.

Because of that, you may want to hire an experienced student loan lawyer to handle the lawsuit.

Let’s talk if you’d like my help with your student loans.

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