Student Loans and Bankruptcy

Most debtors will not be able to discharge student loan debt in Chapter 7 or Chapter 13 bankruptcy. However, if you can prove that repaying your student loans would cause an undue hardship to you then you may qualify to discharge your student loan debt. 

The Undue Hardship Exception

In order to have your student loans wiped out in bankruptcy, you must demonstrate that it would be an undue hardship for you to pay them.  The test for determining undue hardship varies between courts.

Regardless of the test used, most courts are reluctant to discharge student loans. However, if you have very low income or your loans are from a for-profit trade school, you may have a better chance.

The Brunner Test

Some courts, including the Northern District of Texas, Fort Worth and Dallas Divisions,  use the Brunner  test. Under this standard, you can discharge your student loans if you meet all three of these factors:

  • Poverty. Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
  • Persisitence. Your current financial situation is likely to continue for a significant part of the repayment period.
  • Good faith. You have made a good faith effort to repay your student loans. 

 

Discharging All or Part of Your Student Loans

Many courts look at the undue hardship test as all or nothing – either you qualify to get the whole loan discharged, or you don’t. 

Procedure to Discharge Your Student Loans in Bankruptcy

If you want to try to discharge your student loans in bankruptcy, you must file a formal complaint with the bankruptcy court, called a Complaint to Determine Dischargeability. It’s then up to you to prove to the court that payment of your loans will cause an undue hardship on you.

Consider Consulting With an Attorney

There are lots of court cases that apply the Brunner test or other standards to Chapter 7 and Chapter 13 debtors. Knowing what the courts in your jurisdiction have done in the past could help you determine the likelihood of your success. If you have a substantial amount of student loan debt and do not have an attorney, it might be worthwhile to consult with a local bankruptcy attorney about this issue. And if you decide to litigate the dischargeability issue you’ll most likely need an attorney to represent you.

What Happens If Your Student Loans Are Not Discharged?

If, as in most cases, your loans are not discharged in bankruptcy, here’s what happens.

Chapter 7 bankruptcyIn Chapter 7 bankruptcy, if payment of your loans is not an undue hardship, you’ll still owe them when your bankruptcy case is over.

Chapter 13 bankruptcy. If you can't discharge your student loans, Chapter 13 bankruptcy provides some other ways that can help. For example, you may be able to pay a reduced amount during your Chapter 13 plan -- although you'll be on the hook for whatever amount is left after your repayment period ends.  For detailed information on how Chapter 13 can help with student loans,