Student Loans and Bankruptcy

You might have heard that Student Loans are a type of debt that can’t be discharged in a bankruptcy proceeding. Technically this is not true.

The section of the U.S. Bankruptcy Code that addresses student loans is : 11 U.S.C. § 523(a)(8)

This provision makes most student loans non-dischargeable in bankruptcy, unless the borrower can prove that repaying them would impose an “undue hardship” on the debtor and their dependents.

Proving undue hardship makes it very difficult to include Student Loan debt in a bankruptcy proceeding. Most attorneys who specialize in bankruptcy cases advise their clients not to file for bankruptcy if the main purpose is only to discharge your Student Loan debt.

For an overview of more effective and less costly remedies for Student Loan debt, click here:

The “undue hardship” exception requires a separate lawsuit inside of your bankruptcy and applies to three main categories of education debt:

Government or non-profit backed Student Loans
Obligations to repay funds received as an educational benefit, scholarship or stipend
Qualified private education loans

So these 3 categories of Student Loan debt are indeed dischargeable in a bankruptcy proceeding but only if “such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents,” 11 U.S.C. § 523(a)(8)

So How Do You Prove Undue Hardship?

Most federal courts use the Brunner test (from Brunner v. New York State Higher Education Services Corp., 1987) to decide whether student loans can be discharged under 11 U.S.C. § 523(a)(8) .

To win, a debtor must prove all three prongs:

Minimal Standard of Living –
The debtor cannot maintain a minimal standard of living for themselves and their dependents if forced to repay the loan.
Courts look at: current income and expenses, housing, food, utilities, medical costs, whether expenses are “reasonable and necessary” (not luxury).
Additional Circumstances –
There must be additional circumstances indicating that this financial situation is likely to persist for a significant portion of the repayment period. Such as chronic illness, disability, dependent care responsibilities or long-term unemployment factors.
Good Faith Effort to Repay –
The debtor must show they made a good faith effort to repay the loans.
This can include: past payments made, attempts to negotiate or seek income-based repayment, efforts to find better employment and communication with debt servicers.
Ignoring loans entirely or refusing income-based options could hurt this element. As you can see, this “undue hardship” is a tough requirement to prove.

The Bottom Line

Student Loans can be discharged in bankruptcy proceedings but they require a separate lawsuit called an adversary proceeding and all of the elements of undue hardship have to be proven in order for one to be granted a discharge. This undue hardship is not only difficult to prove but the adversary proceeding also costs more to prosecute than the bankruptcy case itself.

Typically a basic chapter 7 bankruptcy case will run between $2,000 to $3,500, without including an adversary proceeding. A basic chapter 13 bankruptcy case will run between $3,000 to $5,000. Adversary proceedings often cost $3,000–$10,000+, depending on complexity.

Chapter 7 + Adversary Proceeding: $$5,000 – $13,500+

Chapter 13 + Adversary Proceeding: $6,000 – $15,000+

In addition, a chapter 7 bankruptcy will require that you sell all of your non-essential assets and a chapter 13 bankruptcy only protects you from foreclosure or asset seizure. You will still have to pay the outstanding debts over 3-5 years based on a court order.

Here is a link to a concise and easy to understand breakdown of the differences between a Chapter 7 Bankruptcy and a Chapter 13 Bankruptcy .