Can You File Bankruptcy on Private or Federal Student Loan Debts?

Danika McClure  | 

For those who are struggling with their debts, bankruptcy can be a solution to getting your finances back on track. Although it’s a viable solution for many, it’s certainly not the most ideal situation to be in. Typically, bankruptcy shows up on your credit history for a minimum of seven to ten years, making it more difficult to qualify for housing, auto loans, and credit cards.

But what happens when you file for bankruptcy and you have student loan debt?

Bankruptcy and Student Loans

Filing for bankruptcy helps U.S. citizens who can no longer pay their debts get a fresh start. In most cases, individuals either liquidate their assets or create a repayment plan in order to settle their debts.

Typically, people file for bankruptcy when they have trouble making minimum payments on their credit cards, are constantly being harassed by bill collectors, use credit cards to pay for basic necessities, or just generally feel that they are out of control of their financial prospects.

When it comes to student loans, however, bankruptcy can get a little hairy.

Student loans are difficult, but not completely impossible to discharge when filing for bankruptcy. In order to do so, however, you must prove that paying student loans will impose a significant hardship on you, your family, and your dependents.

In most court cases, an evaluation called a “Brunner Test” is used to determine whether individuals are able to pay for their student loan payments, or whether their student loan debt might be eradicated.

Under the Brunner test, a bankruptcy judge will examine three factors to best determine whether your student loans could cause undue harm.

  1. Based on your current financial situation, including income and current debts, you are unable to maintain a standard of living for yourself and your family if you are forced to pay off your student loans.
  2. Your financial situation is expected to continue for a significant portion of the repayment period.
  3. You have been consistent in trying to pay off your student loan debt.

While these situations are rare, it’s much more likely that older litigants may find it easier to settle their student loan debts. If you can successfully prove that your student loan payments will result in undue hardship, your student loan may be completely forgiven.

Does Bankruptcy Clear Student Loan Debt?

Thought it is difficult to get student loan debt discharged, it’s not impossible. According to a 2011 study, nearly 40 percent of borrowers who do decide to include their student loans in their bankruptcy filing have a portion of their student loan debt eradicated. The study also found that only 0.1 percent of former students who file for bankruptcy choose to include their student loan debt in their bankruptcy proceedings.

If you qualify for and can manage income-based repayment or one of the other options provided by your loan provider, those options may be preferable. But if your debt is overwhelming and your life circumstances don’t allow you to continue making payments, there’s no shame in including your student loan debt in bankruptcy proceedings.

If you’re considering filing for bankruptcy discharge, you’ll need to determine whether your situation falls under Chapter 7 or Chapter 13 bankruptcy.

The difference is simple. According to USA Today, “Chapter 7 filers have virtually no income to pay back any of their debts; Chapter 13 filers might be able to repay at least part of their debt if their student loans were restructured to make them more manageable.

According to recent studies by Jason Iuliano, then a Ph.D. student in Politics at Princeton University, nearly four in ten students that attempted student loan discharge found success. While a forty percent rate means that a majority of people aren’t successful in their endeavors, it’s also not inconsequential.

Iuliano’s studies also found that few who might be eligible for student loan discharge through bankruptcy pursue the endeavor.

“In just the one study year, 69,000 debtors would have been good candidates to receive some or full relief from their student loan debt but they never even tried to discharge the loans,” Iuliano found. “In fact few ever try to discharge their student loans in bankruptcy. 99.9 percent of student loan debtors in bankruptcy never attempt to get a discharge.”

Hire a Student Loan Bankruptcy Attorney

Since student loan debt is not typically included under a bankruptcy filing, it might be helpful for you to enlist the aid of a student loan lawyer. As the legal process can be long and cost significant amounts of money, it’s best for you to determine whether or not filing for bankruptcy is worth the time and money involved. It might be more prudent to consider income-based repayment or other alternatives before going down this path.

With the help of an experienced attorney, you’re significantly more likely to to have your student loans discharged.

Most bankruptcy attorneys offer free initial consultations, allowing you to meet face-to-face, ask initial questions, and find the person who you believe will best help you discharge your student loans. Perhaps most importantly, it’s important that you find someone who you are comfortable communicating with.

“If you call a bankruptcy office and they are not the best communicators or the friendliest to talk to, call another office,” notes financial expert Steve Rhode. “In fact you might want to contact several offices and see if you “connect” with them. Start you search there. An exceptional bankruptcy attorney and bankruptcy office will make the process, easier, not harder. They will realize you are feeling stressed and apprehensive, as most people are in that situation, and make the process as painless as possible.”

Choosing to file for bankruptcy is not an easy decision, especially when you’re trying to grapple with student loan debt. Though the process isn’t easy, many students have been able to find relief from the weight of their student loan debts through bankruptcy.


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This post was updated March 1, 2018. It was originally published March 4, 2018.