How do I file for bankruptcy on student loans?
Like many borrowers, I was told student loans were “good debt” that would lead to a steady income. That after 10-plus years working at public universities, the government would forgive the crushing multi-six-figure student loan debt I borrowed to get the Ph.D. I needed to teach college.
What no one told me was that predatory hiring practices endemic to higher education mean only a handful of professors are classified as full-time. And thanks to a loophole in the Public Service Loan Forgiveness Program, lack of full-time status would leave me out of forgiveness, despite the degree’s low pay and high price tag.
But after years of sleepless nights and anxiety-ridden days, I’m taking back control. And you can too. One option is filing bankruptcy on your student loans. It isn’t easy and won’t work for everyone. But if you qualify, you could be out of debt sooner than you think.
How to File Bankruptcy on Student Loans
It’s a common myth that you can’t file for bankruptcy on student loans. It is possible to get student loan debt canceled, also known as discharged, in bankruptcy.
The process involves more steps, and borrowers must meet strict standards they don’t have to otherwise. But if you qualify and take it step-by-step, you can finally get out from under crushing student debt by filing bankruptcy.
1. Consult With a Bankruptcy Attorney
It’s possible to file for bankruptcy on your own, but bankruptcy laws are complex. It’s a highly specialized area of law. And when you add in the nuances of student loan regulations, it only becomes more complicated.
Thus, consulting with an attorney isn’t really optional if you’re considering bankruptcy.
To find one, you can search an online directory, such as those on the National Association of Consumer Bankruptcy Attorneys, National Association of Consumer Advocates, or American Bar Association websites.
Be aware that online directories simply list attorneys in your area. The attorneys are rarely vetted for quality. So you need to do that yourself. Look for a fair price, a communication style you’re comfortable with, and — above all — expertise on student loans.
Most attorneys offer a free consultation or an initial conference for a nominal charge. So you can interview several before deciding.
Ask them how many student loan bankruptcies they’ve handled and if they have bankruptcy certification from the American Board of Certification.
A good student loan bankruptcy attorney will discuss alternatives to bankruptcy, such as settlement or income-driven repayment plans. So don’t be put off. The best attorneys are looking for the best solution for you.
There’s no one right amount a bankruptcy attorney should charge, as fees can vary widely from one state to another, by the type of filing, and by the amount of debt.
Attorneys typically charge between $500 and $3,500 for a Chapter 7 filing (a complete discharge), and you must pay that fee upfront.
A Chapter 13 (debt reorganization) can cost between $1,500 and $6,000. But the attorney’s fees are incorporated into the total monthly amount the court deems you can pay to all your creditors.
If you can’t afford to hire an attorney, search these resources for free legal help:
- Legal Services Corporation. LSC is a congressionally created independent nonprofit that offers legal aid to low-income Americans. Search their website by zip code for a local pro bono (free) attorney.
- The American Bar Association. The ABA is a go-to for finding lawyers in any field. And that includes those who work pro bono.
- Student Loan Borrower Assistance. This nonprofit keeps a limited list of legal aid organizations by state.
- Massachusetts Student Loan Bankruptcy Assistance Project. This group of attorneys and law firms offers free representation for those suing their student loan company during the bankruptcy process.
- Oregon Student Debt. This bankruptcy clinic offers pro bono legal aid to those who qualify. For those who don’t, their website offers step-by-step instructions and examples on how to file your complaint without an attorney.
2. Decide Which Type of Bankruptcy to File
There are two very different bankruptcy options for discharging your student loans.
Chapter 13 requires a court-structured payment plan that gathers all your debts into one monthly payment you can afford. The bankruptcy court takes into account your budget — including your living expenses and income — and determines an amount to pay your creditors based on what you have left.
Each creditor, including your student loan lender, gets a proportion of each payment according to the established order of priority over three to five years. At the end of the repayment term, the creditors discharge any remaining dischargeable debt, which may or may not include your student loans.
Chapter 7 immediately cancels all your dischargeable debt. For example, you could immediately have all your credit card debt and medical bills eliminated by the bankruptcy court, but you might still walk away with all your federal student loan debt if it’s found to be nondischargeable.
Which type you file is less a decision of preference than which one you qualify for. There are mathematical formulas involved in bankruptcy.
To qualify for Chapter 7 bankruptcy, you must meet a low enough threshold of income and assets. If your income or assets are too high, you’ll have to do Chapter 13. And if your income and assets are too high for Chapter 13, you won’t be able to declare bankruptcy at all.
Your attorney will help you figure out which you qualify for.
3. Demonstrate Private Student Loan Debt Isn’t Exempt
Borrowers and attorneys have long believed all private loans were nondischargeable in bankruptcy except through an adversary proceeding, which involves suing your student loan company. But years of analysis by student loan attorneys and bankruptcy judges are challenging the prevailing wisdom.
To be considered a nondischargeable student loan according to current bankruptcy code, a loan must meet one of three standards.
- Have been lent, guaranteed, or funded by the government
- Be a qualified education loan
- Be classified as an educational benefit, scholarship, or stipend
A qualified education loan is one used only for higher education costs at certain accredited institutions. A private loan that doesn’t fit the definition isn’t subject to student loan bankruptcy limitations.
That could include a loan that exceeds the school’s total certified cost of attendance or that’s paid directly to the borrower rather than through the school. Or it could include a loan used to pay for a nonaccredited program at a for-profit school.
Additionally, lawyers and judges have long considered the phrase “educational benefit” to include loans. But the courts of appeals for the 2nd, 5th, and 10th Circuits ruled that the educational benefit category doesn’t include private student loans.
Though you can’t predict how your case will go, these prior cases set a new standard that makes it easier to get some loans discharged.
Further, though it’s true you must meet a high standard in most cases and prove undue hardship, your student loan creditors must also meet certain standards. They must satisfy the “preponderance of evidence” standard. That means the burden of proof is on them to show both that you owe the debt and that it’s the type of debt that qualifies for exemption from bankruptcy.
Even if your private student loans do meet the definition of a nondischargeable student loan, you can still attempt to get them discharged by filing an adversary proceeding.
4. File an Adversary Proceeding
Unlike other forms of debt, you can’t get a bankruptcy discharge on student loans unless you file a separate action known as an “adversary proceeding.” It’s a lawsuit you bring against your student loan company. Essentially, you must take issue with the nondischargeability of the loan.
If you filed a Chapter 7 bankruptcy, you (or your attorney) should file the adversary proceeding right after filing your bankruptcy case.
If your case is already closed, you can still file an adversary proceeding, but you must first move to reopen your bankruptcy case. Don’t worry. It’s just procedural and doesn’t restart the bankruptcy or eliminate the discharge you already received for your other debt.
If you filed a Chapter 13 bankruptcy, the timeline depends on the bankruptcy court rules where you live. But even if you win the adversary proceeding, your student loans won’t be discharged until after you complete the Chapter 13 repayment period and have earned the discharge of your other debts.
You start an adversary proceeding when you file a complaint against your student loan lender. The new proceeding gets its own case number separate from your original bankruptcy case, and any new filings go under that new number.
The case then advances through the same stages as a typical lawsuit. That includes discovery, where you must produce all your evidence, and trial, where lenders can — and typically do — defend against the suit. It’s an expensive and lengthy process.
Moreover, student loan adversary proceedings are difficult to win, as student loan lenders — including the federal government — generally have more resources than borrowers. That’s another reason it’s crucial you hire an experienced attorney.
5. Demonstrate That Your Student Loan Debt Creates an Undue Hardship
To get your student loan debt discharged in bankruptcy, you must prove it’s causing you (and any dependents) undue hardship. However, Congress never explicitly defined the phrase, so the courts have adopted their own standards.
All federal courts except for the 1st and 8th Districts apply what’s called the Brunner test to determine whether a borrower is eligible to have their student loans discharged.
To pass the Brunner test, the court looks at whether these specific standards apply to you:
- Making payments will keep you from being able to maintain a minimal standard of living.
- You’re unlikely ever to earn enough money for the situation to change.
- You’ve already made a good-faith effort to repay the loan.
In practice, the Brunner test is a difficult standard to meet. That’s because the essential question the bankruptcy court judge must ask is whether the borrower could ever have the ability to repay the loan.
Thus, one bankruptcy court judge referred to the Brunner test as requiring “a certainty of hopelessness” and not just a current inability to repay the debt. And judges have ruled that prolonged unemployment, alcoholism, and even a criminal record aren’t enough to qualify as “hopeless.”
It’s a more difficult standard to meet on federal student loans than private ones because federal loans come with alternatives for struggling borrowers. You have access to deferment or forbearance and income-driven repayment plans, which could be as low as $0 if your income is low enough.
But it’s not impossible. There are student loan borrowers who’ve succeeded in getting their student loans discharged in bankruptcy.
Totality of Circumstances Test
The 8th Circuit is the only one of the country’s 12 circuits that officially applies a different test. Although similar, many would argue it’s more flexible and less strict.
The totality of circumstances test takes a broad view of whether the debtor’s circumstances create undue hardship, so no one factor makes or breaks your case.
Under the totality of circumstances test, the court considers:
- Your current, past, and potential future financial resources
- Reasonable necessary living expenses
- Other relevant factors
However, under either standard, the bar is high. And the burden of proof is on the debtor to demonstrate undue hardship.
It’s long seemed nearly impossible to discharge federal student loans in bankruptcy because courts have applied the standards for meeting undue hardship very strictly.
Moreover, even if a judge rules in a borrower’s favor, the government almost always appeals the case. That means an appeals court judge could overrule the original ruling, and you’d still have to repay the loan.
However, a shift is happening among both courts and policymakers. Judges in courts across the country are tired of seeing borrowers leave bankruptcy court still saddled with massive student loan debt. And they’re beginning to interpret the undue hardship standard more loosely.
As more and more judges apply looser standards to what they deem unfair prior rulings, they set new standards for future bankruptcy cases. That makes it easier for more borrowers to discharge federal and private student loan debt.
6. Get a Judgment
Even if you get a favorable ruling, several outcomes are possible.
- Complete Loan Cancelation. If the court cancels your loans, you don’t have to pay any part of them and all collection efforts stop.
- Partial Loan Cancelation. The court cancels some part of your loan, but you must repay the portion the court determines is a reasonable amount.
- Loan Term Alteration. You may be required to repay your loan in full, but the terms could be altered to be more favorable. For example, your interest rate could be reduced or eliminated.
The court decides how much to forgive based on how much they think you’re able to repay. That means that even after all your effort, your loans may not get fully canceled.
7. Prepare for an Appeal
If the bankruptcy court rules in your favor, prepare for the possibility the lender may appeal the decision. An appeals court judge could overturn the ruling, and you could still end up having to pay your loan.
Fortunately, policymakers are aware the student loan system is failing many borrowers, including those in need of bankruptcy protection. Richard Cordray, chief operating officer of the Office of Federal Student Aid, told a House education subcommittee that the bankruptcy process isn’t working and needs to be reformed.
And The Washington Post reports the government is reconsidering which cases it decides to appeal rather than fighting every ruling courts make in the borrower’s favor.
Conversely, if you lose your suit, you could appeal the case and attempt to overturn the ruling. However, the judgment of the appeals court is generally considered final unless you can take issue with the law itself rather than the judge’s ruling.
For example, in June 2021, a borrower seeking to discharge her student loans in bankruptcy appealed to the U.S. Supreme Court after a judge in the U.S. 5th Circuit Court of Appeals failed to overturn her original judgment. But her appeal to the Supreme Court was to clarify which test for undue hardship should be applied since there’s no universal standard.
Your lawyer can help you figure out whether or not you can appeal and for what reasons.
When Student Loan Bankruptcy Makes Sense
Although the tide is shifting when it comes to student loan bankruptcy, it continues to be a difficult road. Thus, it’s only worth exploring if:
- You’ve Exhausted All Repayment Options. For federal student loans, look into income-driven repayment, which bases your monthly payments on a percentage of your discretionary income (usually 10%). Private student loans have fewer options, but it’s worth calling your lender before opting for bankruptcy.
- You’re in Default on Your Student Loans. If you’re in default for financial reasons, your only options with private loans are bankruptcy or a settlement, which requires at least some money. You have more options for getting out of default with federal loans.
- You Have No Pathway Out of Default. Federal student loans have options for getting out of default, such as consolidation and rehabilitation. But you can only rehabilitate your loans once. So if you’ve defaulted multiple times, you may be out of options.
Being in one of these situations is no guarantee a court will find in your favor. And if you lose your case, you owe even more in collection fees and interest. Plus, you may have to pay attorney fees.
So think carefully about whether the attempt is worth it. Bankruptcy is for those who are in dire straits. While student loans might be a big part of that picture, it’s usually only one part. So if they’re the sole reason you’re declaring bankruptcy, it may not be worth the time, effort, and expense.
It’s best to consult a qualified attorney for help deciding.
There’s an ongoing cultural shift around student loans. And that includes among policymakers. A recently introduced bipartisan bill, the Fresh Start Through Bankruptcy Act of 2021, would allow discharge in bankruptcy after 10 years without needing to prove hardship.
Unfortunately, its chance of passing is slim. So it’s worth exploring other options to get relief from your student loan debt.
One possibility is to attempt to settle it for less than you owe. Although you won’t have the full amount discharged, it may be more achievable than bankruptcy, especially for private student loans.
Alternatively, if you plan to argue undue hardship for federal student loan repayment based on a physical or mental disability, you may not need to go to bankruptcy court. Instead, you may qualify for automatic discharge under the total and permanent disability discharge. See StudentAid.gov for details on how to apply.
While there aren’t many circumstances under which borrowers might find alternatives for canceling their student loan debt, it’s worth investigating all avenues to find relief.