You Can Discharge Student Loans in Bankruptcy … But Good Luck

Unlike most types of debt, student loans have to meet an incredibly high standard of “undue hardship” in order to to be discharged through bankruptcy.

Student loan debt in this country is a big problem. How big, you ask? Well, over 44 million Americans owe over $1.5 trillion dollars in student loan debt, with an average debt load just over $37,000. And would you be surprised to learn that 30 percent of borrowers are seriously struggling with their debt repayments? Yeah, we’d say this problem is pretty darn big.

You’d hope that steps were being taken to fix this situation, but with protections for student borrowers being slashed and the nation’s largest student loan servicer constantly under fire for deceptive practices, there don’t seem to be any real policy solutions in sight. The looming student loan debt crisis might come to be the defining issue for this period of American history.

The dangers of too much student debt.

In past definitions of debt, student loans have been considered a “good” type of debt, as that education helps the borrower earn a higher income over time. But are reaching a point where the skyrocketing costs of a college education translate to huge student loan payments that hobble consumers over the long-term. When it comes to student loans, too much of a “good” thing can be quite dangerous indeed.

The really scary thing about student debt is that, unlike most other forms of debt, there isn’t any way to get out from under it, not even as a last-ditch effort. Defaulting on a home or car loan means getting evicted or having your vehicle repossessed, but at least you can escape the debt itself. And with unsecured personal loans, installment loans, or medical debts, you can file for bankruptcy. Sure, it’s not going to be a fun process, but you can still get out from under your debt load and start over.

With student debt … not so much.

Can you discharge student loans through bankruptcy?

Yes. You can file for bankruptcy and ask that your student loans be either fully or partially discharged or restructured, but the chances of that actually happening at not good at all. In order to include your student loans in a bankruptcy filing, you’re going to have to prove “undue hardship,” and that will be very difficult to do.

When you file for bankruptcy, you are going to either file for Chapter 7 or Chapter 13. Under Chapter 7, your debts are entirely wiped out, but your valuable assets (like your house, car, or other valuable possessions) will be surrendered and sold in order to pay your creditors. Under Chapter 13, you pay all or parts of your debts off under a court-approved repayment plan.

In order to try and discharge your student loans as part of Chapter 7 or Chapter 13 bankruptcy, you will have to file a separate action called an “adversary proceeding.” This action asks the court to find that your loan obligations impose an “undue hardship” on your life and the lives of your dependents. Under that designation, your student loans would be discharged.

Proving undue hardship for student loans is TOUGH.

Simply put, it will be incredibly difficult to get the court to rule in your favor. When it comes to student loans, the rulings for “undue hardship” will vary from judge to judge and from area to area, but US courts all generally adhere to the Brunner definition.

Under the Brunner test for undue hardship, you must prove that:

  1. Repaying your loans would make maintaining a minimal standard of living impossible under your current income and resources.
  2. You are going to be unable to improve your financial situation for the vast majority of the loan repayment period.
  3. You have made a good faith effort to repay your loans.

Proving all three of these factors is extremely difficult, and most judges are going to be very reluctant to discharge your student loan debt. Take the example laid out in this opinion piece from USA Today:

Consider the case of Vera Thomas, 62, who was chronically ill when she filed for bankruptcy relief in 2017. The Dallas resident had been unemployed for two years, had no income, subsisted on food stamps and was facing eviction. The bankruptcy court wiped out her credit card debt, medical bills and auto loan but not her student loans.

The federal government, as it frequently does, fought Thomas’ discharge by arguing her situation wasn’t hopeless enough to warrant erasing her $7,800 student loan debt.

Judge Harlin Hale, in denying relief, sympathized with Thomas but indicated his hands were tied. Because of the “incredibly high burden” of proving a hopeless future, Harlin said that in 15 years on the bench he had never discharged a student loan over the objection of the lender.


A look back, and the way forward.

Prior to 1976, all students loans could be discharged through bankruptcy. Then Congress passed a law saying that no student loans could be discharged during the first five years of repayment. That was later extended to cover the first seven years of repayment.

In 2005, Congress made it even harder. They passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which imposed the “undue hardship” burden upon anyone looking to discharge any student loan (both federal and private) in bankruptcy.

Still, there’s some hope. In February, the U.S. Department of Education announced that they would review the standards under which “undue hardship” was determined for student borrowers. Don’t hold your breath for any big changes, but it’s still a positive sign.

Even if bankruptcy is not a viable path for discharging your student debt, there are still other ways to try and ease your payment burden. To learn more, check out our blog post, What’s the Best Way to Tackle Student Loan Debt?

All of us here at the OppLoans Financial Sense blog are dedicated to helping people manage their debts. That’s why we so often write about avoiding dangerous short-term bad credit loans and no credit check loans like title loanscash advances, and payday loans! But if you want to learn more about dealing with debt in general, check out these other great posts and articles from OppLoans:

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