Student Loan Debt Under Bankruptcy Law

One objective of filing Chapter 7 or Chapter 13 bankruptcy is obtaining a discharge of consumer debts. However, certain debts are non-dischargeable, and student loans are often among them. The sole exception is when a debtor can prove that repaying the students loans would cause an undue hardship. If you can prove undue hardship, you can get your student loans discharged.

In most courts, you can either get the entirety of your student loan discharged, or you cannot get it discharged at all. Certain courts, however, may be willing to discharge a portion of the student loan if you pass the hardship test that they employ.

Generally if you want to discharge student loans, you will need to file a Complaint to Determine Dischargeability with the bankruptcy court. This initiates an adversary proceeding separate from your bankruptcy case. You will then need to prove to the court that repaying loans would cause an undue hardship. In addition to affirmatively showing undue hardship, you may also have various defenses to a creditor’s proof of claim, such as breach of contract or unfair business practices. If you successfully prove one or more of these defenses, you will not need to repay the debt.

It is difficult to pass the undue hardship test, but not impossible. An academic paper published in the American Bankruptcy Law Journal found that at least 40 percent of debtors who include their student loans in their bankruptcy filing were able to get some or all of their student loans discharged.

Undue Hardship Test

Undue hardship is determined according to different tests, depending on the court, but most courts grant an undue hardship motion only in a very narrow range of cases. Most commonly, you can get a student loan discharge only if you experience a serious disability that prevents you from being able to work and have dependents, or you are elderly. It may help to consult an experienced bankruptcy attorney who knows which undue hardship test is applied in your local bankruptcy court and how it is applied. If your attorney knows what courts in your area have done in the past, you will have a better chance of persuading the court. Moreover, an attorney can help you litigate a defense to a creditor’s proof of claim.

One of the tests used by courts is the Brunner test. Under the Brunner test, you can only discharge student loans if:

• Repaying the student loans would result in you and your dependents living in poverty and make you unable to maintain even a basic standard of living;
• Your situation will continue over a substantial portion of the student loan repayment period; and
• You have made a good-faith effort to repay the loans.

Another test used is the “totality of circumstances test.” Under this test, courts look at all relevant factors to decide whether paying back your student loans poses an undue hardship.

If you cannot pass the undue hardship test, and you have filed for Chapter 7, you will still owe the student loans after your Chapter 7 case is over. However, if you filed for Chapter 13, you may be able to pay a reduced amount during the course of your Chapter 13 plan, which takes three to five years. You will still need to repay student loans, however, when the Chapter 13 case is concluded and your consumer debts are discharged.

Last reviewed October 2024