If you’re a borrower that financed your education with student loans, you may think that you can file for bankruptcy and student loans just disappear. Unfortunately, that’s simply not the case. If you file Chapter 7 or Chapter 13 bankruptcy, you must also file a separate action called an “adversary proceeding” in which you request that the bankruptcy court find that repaying your student loans imposes an undue hardship on you or your dependents.
Your creditors may be present to challenge that undue hardship claim, and it ultimately falls on the discretion of the court to determine whether your claims have merit. Per the Office of Federal Student Aid, an arm of the U.S. Department of Education, a court considering your bankruptcy and student loans will look at several factors.
Bankruptcy and Student Loans Considerations
Can you maintain a minimal standard of living? The bankruptcy court will assess your financial situation, look at your current and prospective income as well as reasonable expenditures for things like rent, insurance, and other costs of living, and determine whether repaying your student loans puts maintaining a minimal quality of life out of reach. What constitutes a minimal standard of living will vary greatly based on your location, your family composition, and the views of the bankruptcy court.
How long will the hardship last? If the court does find that repaying your student loans will be an undue hardship on you and your family, the next question is for how long. As mentioned above, a bankruptcy court will consider not only your current income, but also your prospects for generating more income in the future or otherwise stabilizing your financial situation.
If the court finds that the hardship you’re experiencing is likely to be temporary (for instance, if you have a graduate degree in accounting but are currently working a service job while you look for longer-term employment), it may decline to discharge the debt through bankruptcy and student loans will remain an obligation for you.
When looking at this factor, the court will consider regional employment conditions as well as your education and experience.
Have you acted in good faith with your lender? One of the final considerations for a bankruptcy court is your conduct with your lender or loan servicer. The goal of the bankruptcy court is to weigh the obligations you’ve willingly taken on against the reality of your financial situation.
This means the court will balance your interest in getting out from debt against the lenders’ interests in being repaid. If you have a history of making payments, working with your lender on alternative or financial hardship payment plans, or can demonstrate that you’ve made repeated efforts to communicate your hardship to your lender, this will weigh in your favor.
If the court determines that your student loans will present a prolonged hardship, and that you’ve made efforts to otherwise modify them, it may discharge part or all of your loans, or it may structure a new repayment plan by modifying the terms of the loan, such as minimum payments or your interest rate.
In the event that you file for bankruptcy and student loans are not modified, you are not entirely out of options. You may be able to secure grants to help you repay your loans; you may be able to find employment in an industry that offers loan forgiveness after a period of time (such as Public Service Loan Forgiveness); or you may be able to consolidate your loans with more favorable terms (although finding a lender to consolidate your loans will likely be easier prior to a bankruptcy filing).
Bankruptcy and student loans is not a perfect solution (bankruptcy is generally best avoided due to the difficulty of the process and damage to your credit). However, if you have made a good-faith effort to work with your lenders and you are unable to maintain a minimal quality of life, bankruptcy can help you climb out from under the burden of student loans.
What strategies have you or someone you know employed to reduce the burden of student debt?
*This post has been updated from a version published in 2021.