Yes, you can file bankruptcy on student loans in the United States, but it’s not automatic or straightforward. To discharge student loans in bankruptcy, you must prove “undue hardship” through a separate legal proceeding called an adversary proceeding. This requires meeting strict legal tests that evaluate your financial situation, future prospects, and good faith efforts to repay. Recent policy changes have made the process somewhat more accessible, but it remains challenging compared to discharging other types of debt.
For millions of Americans struggling with student loan debt, bankruptcy often seems like the forbidden solution — widely believed to be impossible. This misconception keeps many borrowers from exploring a potentially viable option. Let’s cut through the confusion and examine what’s actually possible.
The Reality of Student Loans in Bankruptcy
The notion that student loans can never be discharged in bankruptcy is simply untrue. The process is difficult, yes, but not impossible. Understanding the specifics can help you determine whether this path might work for your situation.
The Legal Framework: How It Works
Bankruptcy law treats student loans differently from most other consumer debts. While credit cards and personal loans are typically discharged automatically in Chapter 7 bankruptcy, student loans require an extra step: proving that repayment would cause “undue hardship.”
This special treatment began in 1976 when Congress added the first restrictions on discharging student loans in bankruptcy, with further limitations added in subsequent decades. By 2005, both federal and private student loans had strong protections against bankruptcy discharge.
The bankruptcy process for student loans involves the following the following:
- Filing either Chapter 7 or Chapter 13 bankruptcy
- Initiating an adversary proceeding (essentially a lawsuit within your bankruptcy case)
- Proving undue hardship to the court’s satisfaction
For borrowers facing genuine financial distress, this process might be worth considering as part of broader student debt solutions.
Understanding “Undue Hardship”: The Key Hurdle
Courts typically use one of two tests to determine whether your student loans cause undue hardship.
The Brunner Test
Most jurisdictions use the Brunner test, which requires you to prove all three of these conditions:
- Minimal Standard of Living — You cannot maintain a minimal standard of living for yourself and your dependents if forced to repay the loans
- Persistent Hardship — Your financial situation is likely to continue for a significant portion of the repayment period
- Good Faith Efforts — You have made good faith efforts to repay the loans before filing for bankruptcy
The Totality of Circumstances Test
Some courts use this more flexible standard, which examines:
- Your past, present, and likely future financial resources
- Your reasonable living expenses
- Any other relevant facts and circumstances
Each test presents significant challenges, but understanding what applies in your jurisdiction is crucial for preparing your case.
Success Rates & Recent Changes
The difficulty of meeting these standards has historically resulted in few borrowers even attempting to discharge student loans in bankruptcy. However, two recent developments have shifted the landscape:
Department of Education Policy Changes
In November 2022, the Department of Education announced new guidance for evaluating undue hardship cases for federal student loans. These changes encourage government attorneys to support discharge in clear cases of hardship rather than aggressively opposing all attempts.
Court Precedents
Some courts have begun interpreting the Brunner test less strictly, acknowledging that the standard had become unreasonably harsh over time. Cases like Rosenberg v. N.Y. State Higher Education Services Corp (2020) have shown that discharge is possible with the right circumstances and legal approach.
Who Might Qualify? Assessing Your Situation
While every case is unique, certain situations may strengthen your argument for undue hardship:
| Factor | More Likely to Qualify | Less Likely to Qualify |
| Income | Below or near the poverty level | Above median income for your area |
| Employment | Disabled or unable to work | Employed with growth potential |
| Duration of Hardship | Long-term or permanent limitations | Temporary or recent financial problems |
| Previous Payment Efforts | Consistent attempts to pay or seek alternatives | Few or no attempts to make payments |
| Age/Retirement | Near retirement age with limited earning years remaining | Young with many potential earning years ahead |
| Loan Type | Private student loans | Federal loans with income-driven options |
Before pursuing bankruptcy, many borrowers should explore whether paying off student loans through other means might be viable or investigate rehabilitation options for defaulted student loans.
The Step-by-Step Process
If you decide to pursue student loan discharge through bankruptcy, here’s what the process typically involves:
1. Consult with a Bankruptcy Attorney
Not all bankruptcy attorneys have experience with student loan adversary proceedings. Look for someone with specific experience in this area, as their expertise can substantially impact your chances of success.
2. File Bankruptcy (Chapter 7 or Chapter 13)
Your attorney will help you determine which type of bankruptcy best fits your situation. Chapter 7 liquidates non-exempt assets to pay creditors, while Chapter 13 reorganizes debts into a payment plan.
3. File the Adversary Proceeding
This separate lawsuit within your bankruptcy case specifically addresses your student loans. The filing includes:
- A complaint outlining why your loans cause undue hardship
- Supporting documentation of your financial situation
- Legal arguments addressing the applicable hardship test
4. Discovery and Preparation
Both sides exchange information and documentation. Your lenders may request:
- Detailed financial records
- Medical documentation (if applicable)
- Employment history
- Evidence of attempts to pay or seek alternatives
5. Trial and Judgment
A bankruptcy judge hears evidence from both sides and determines whether your loans meet the undue hardship standard. The judge can:
- Discharge all loans completely
- Discharge a portion of the loans
- Deny discharge entirely
6. Possible Appeal
Either side can appeal the judge’s decision if they believe legal errors occurred.
Alternatives to Consider First
Before pursuing bankruptcy, consider these less drastic options:
For Federal Student Loans:
- Income-Driven Repayment Plans: These adjust your monthly payment based on income and family size, potentially reducing payments to as low as $0
- Forgiveness Programs: Public Service Loan Forgiveness and other programs may cancel remaining balances after a certain number of qualifying payments
- Settlement: In some cases of severe financial hardship, the Department of Education may accept a settlement for less than the full amount
For Private Student Loans:
- Refinancing: If you have good credit, you might qualify for lower interest rates
- Lender Hardship Programs: Some private lenders offer their own forbearance or modified payment options
- Settlement Negotiations: Private lenders may accept lump-sum settlements for significantly less than the full balance in cases of financial hardship
For those who don’t qualify for standard private student loans without a co-signer, bankruptcy might seem like the only option. However, exploring all alternatives first strengthens your case if you eventually pursue discharge.
The Future of Student Loan Bankruptcy
Proposed legislation could dramatically change how student loans are treated in bankruptcy. The Student Borrower Bankruptcy Relief Act, reintroduced multiple times in Congress, would eliminate the undue hardship requirement entirely, treating student loans like most other consumer debts.
While these proposals have gained support, none have passed yet. For now, borrowers must navigate the existing system.
Making the Decision: Is Bankruptcy Right for You?
Consider these factors when weighing bankruptcy as an option:
- Total debt burden: How do student loans compare to your other debts?
- Income prospects: Is your financial hardship likely to improve?
- Available alternatives: Have you exhausted income-driven repayment, scholarship, and loan repayment programs or other options?
- Costs: Can you afford the legal fees for an adversary proceeding?
- Credit impact: Are you prepared for the 7-10-year impact on your credit report?
For those truly unable to pay, the bankruptcy option, though difficult, may provide the fresh start that bankruptcy law was designed to offer.
Taking the Next Step
If you’re drowning in student loan debt with no realistic path to repayment, consulting with an attorney experienced in student loan bankruptcy cases is the logical next step. Many offer free initial consultations to evaluate whether you might have a viable case.
Remember that bankruptcy should generally be considered after exploring other options, but don’t rule it out based on outdated beliefs about its impossibility. For some borrowers, it provides the relief needed to rebuild financial stability.
Need more guidance on managing student loan debt and exploring all your options? Visit Wealthopedia.com for comprehensive resources on student loan management, repayment strategies, and financial planning tools tailored to your unique situation.
