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Can You Discharge Your Student Loans In Bankruptcy?
Updated On November 2, 2021
Editorial Note: This content is based solely on the author's opinions and is not provided, approved, endorsed or reviewed by any financial institution or partner.
Are you considering filing for student loans bankruptcy? Here is what you need to know about bankruptcy and student loans so you’re fully informed.
With Public Service Loan Forgiveness on the brink of elimination and federal student loan repayment programs expected to be restructured, student loan borrowers have plenty of new information to digest.
One facet of higher education finance has not changed, however: the inability to discharge your student loans in bankruptcy.
Mentor interviewed Josh Cohen, a Vermont-based attorney who specializes in student loans, to share his perspectives.
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Mentor: Can your student loans be discharged in bankruptcy?
Josh Cohen: Yes, but only if certain conditions are met. Normally, however, they are not dischargeable.
Mentor: Let’s speak more about those conditions. In most jurisdictions, a borrower has to establish “undue hardship” under the Brunner test.
Josh Cohen: Yes, the Brunner test is the legal test in all circuit [courts], except the 8th circuit and 1st circuit.
The 8th circuit uses a totality of circumstances, which is similar to Brunner, but a bit easier to deal with.
The 1st circuit has yet to declare a standard.
In plain English, the Brunner standard says:
- the borrower has extenuating circumstances creating a hardship;
- those circumstances are likely to continue for a term of the loan; and
- the borrower has made good faith attempts to repay the loan. (The borrower does not actually have to make payments, but merely attempt to make payments – such as try to find a workable payment plan.)
Of course there’s a bit of variance across federal districts, but that’s the basic framework.
Mentor: What is the process to discharge student loans in bankruptcy?
Josh Cohen: In order to have a student loan discharged through bankruptcy, an Adversary Proceeding must be filed (a lawsuit within bankruptcy court), where a debtor claims that paying the student loan would create an undue hardship for the debtor.
Mentor: What are your views regarding private student loans compared to federal student loans?
Josh Cohen: Private loans, unlike a mortgage or car debt, cannot be cancelled as easily in bankruptcy. Worse, many private lenders require a co-signer.
That means two people are in trouble if the loan is not paid. The number of parents who are caught in this nightmare, trying to retire with this over their head, is astounding.
Mentor: What’s the underlying reason why borrowers cannot file for student loans bankruptcy?
Josh Cohen: There is a story about doctors crossing the stage as they graduate medical school with a diploma in one hand and a bankruptcy filing in the other.
It is the fear that people would go to school and immediately file bankruptcy.
Mentor: What happens when a borrower files for student loans bankruptcy, and what are the implications?
Josh Cohen: There are many factors to consider when looking at bankruptcy. While most people believe internet myths, only a bankruptcy attorney can tell you the true implications – good and bad – of filing.
Most people can keep their house and car. Unsecured debts like credit card debt goes away. Credit is impacted, but for a borrower who is already behind on payments, the credit damage may not be any worse then where they are.
Mentor: Student loans used to be dischargeable in bankruptcy, but that changed over time. What happened?
Josh Cohen: Congress made student loans non-dischargeable over a period of years.
At first, [student loans] were dischargeable if they had been in repayment for five years.
Then, [Congress] extended it to seven years. Then, in 1998, they removed discharge ablility except if a debtor could show that paying back the student loans would create an undue hardship. In 2005, they extended this protection to private student loans.
No one really understands why Congress felt federal loans shouldn’t be discharged. Lots of other federal debt is dischargeable, including Small Business Administration (SBA) loans and taxes.
Mentor: What advice would you give borrowers who are facing economic hardship and believe that they are unable to repay their student loans?
Josh Cohen: For federal loans, look to the Income-Driven Repayment plans (IBR, ICR, PAYE and REPAYE). Payment is based on the borrower’s income and family size.
If the payment is still unaffordable, look at why:
Is it a budget issue that a bankruptcy could help?
Would getting rid of credit card debt or medical bills free up cash flow to allow the payments to be affordable?
Is the borrower living in a place with a higher than normal cost of living?
Is the borrower living a bit higher than their means (it happens, but the borrower must be willing to admit this).
Does the borrower have extenuating circumstances that affect their budget?
Mentor: Those who oppose discharging student loans in bankruptcy might argue that the borrower is avoiding responsibility for a debt obligation that he or she committed to pay back. What would you say to those critics?
Josh Cohen: In my eight years of doing student loan work, no one wants to walk away from their loans (unless there is a fraudulent school issue).
What they want is fairness.
Actually, I think bankruptcy can be more powerful than most people realize, including many bankruptcy attorneys.
It’s not about getting rid of the loan, it’s about finding a way to survive it and making it affordable.
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