A Guide to Declaring Bankruptcy for Student Loans

The National Center for Education Statistics reported that only 20% of borrowers paid their student loans off in full, 12 years after beginning their education. Alarmingly, 27% had defaulted on at least one student loan in the same time period.

Many graduates believe that they’re stuck with student loan debt for life — a common misconception is that student loans may not be discharged in a bankruptcy. It may be more difficult to discharge student loan debt compared to other types of personal debt, but it’s not impossible. There are circumstances when an individual may qualify to receive the financial relief they need, including a bankruptcy filing.

What Happens to Student Loans in a Bankruptcy Filing?

There are many reasons why someone may file for bankruptcy. The individual may have been involved in a car accident and is unable to pay their medical bills. Or in the case of student loans, the debt presents an undue hardship. 

In most circumstances, student loans remain intact after a standard bankruptcy filing — particularly if you did not request a determination of undue hardship. However, you may be able to have student loan debt discharged if you can convince the judge the student debt reaches a certain threshold of financial hardship. If the judge agrees to discharge, you will no longer be responsible for the debt.

How to Prove Undue Hardship for Student Loans

Proving undue hardship will require some effort. The burden of proof lies with the individual filing bankruptcy to demonstrate that their student loans constitute an undue hardship. 

The criteria for undue hardship differs from state to state, but most courts follow the guidelines set forth by the Brunner or Totality of Circumstances Test. Take a closer look at how each one works:

Brunner Test

The Brunner Test is the most common method courts use to determine undue hardship. Student loan debtors must meet the following three conditions:

• Inability to maintain a minimal standard of living: The petitioner has to show how continuing to repay the student loan will affect the individual’s ability to maintain a minimal standard of living for themselves and their family.
• The hardship will continue: Perhaps the more difficult of the three factors to prove, the borrower has to show that the hardship will continue for the life of the loan repayment term.
• There’s been a good faith effort to repay: The borrower has to show a history of payments and their good faith attempt at making them.

Individuals who have the best chances of passing the Brunner test are:

• Private loan holders: Those who have private student loans they’re trying to discharge (as opposed to federal loans) have a better chance of succeeding. It’s harder to get federal student loans discharged because the repayment plans are based on income and are more flexible. It’s likely anyone can afford the repayment of a federal loan, making it difficult to prove the inability to maintain a standard of living while paying federal student loans back.
• Having children or disabled dependents: Being responsible for a family and dependents may help a filer’s case when trying to prove the inability of maintaining a minimal standard of living.

Totality of Circumstances Test

The Totality of Circumstances Test is another common way courts determine whether a bankruptcy petitioner qualifies for a student loan discharge. There have been two student loan bankruptcy cases recently in which the judges rejected the Brunner test and applied the Totality of Circumstances Test to grant the discharges instead. Using the alternative method, the court may consider:

• The borrower’s current financial situation, as well as his or her past and future resources;
• The borrower (and any dependents’) reasonable living expenses;
• Relevant information and facts pertaining to the specific case at hand.

The Totality of Circumstances Test may be easier to pass than the Brunner Test. Debtors who don’t have any assets at the time of the hearing (or in the past), such as real estate or savings, may have a better chance of qualifying for discharge using the Totality of Circumstances Test.

The two tests highlighted are the most common tests the courts use to weigh whether a debtor qualifies for a discharge, but they are not the only methods. 

Alternatives to Getting Your Student Loans Discharged

If you are unable to have your student loans discharged due to undue hardship, there are still some alternatives to explore that could make your student loan debt more manageable. One or several of the following alternative strategies may apply to your situation.

Loan Forgiveness

There are various forms of federal and state loan forgiveness to explore. Some programs may require that you work in a specific career field or in an area of public service, such as nursing or teaching, while others are based on personal needs or disabilities. Consider the following programs:

• Public Service Loan Forgiveness: Full-time employees of a non-profit organization or local, state, tribal, or federal government, can qualify for PSLF. They must have Direct Loans or other federal student loans, and make 120 qualifying payments under an income-driven repayment plan.
• Teacher Loan Forgiveness: Teachers who have taught full-time for at least five consecutive years in low-income schools qualify for forgiveness of up to $17,500 of federal student loans.
• Nurse Corps Loan Repayment Program: Nurses who are willing to work at least two years in a Critical Shortage Facility or work as nurse faculty in an eligible school of nursing can have up to 85% of their unpaid student loan debt forgiven through the Nurse Corps Loan Repayment Program.
• Income-Driven Repayment Plan: An IDRP sets your monthly payment to an affordable amount. Pay the amount for 20 to 25 years and the unpaid balance will be forgiven.

Economic Hardship Deferment

The federal deferment program allows borrowers to pause payments for three years if they are struggling to make ends meet. Deferment doesn’t take you off the hook for the loan — you may still have to pay the interest portion of your loan each month or resume payments when your deferment period is over.

Explore Your Legal Options

If you’re worried about your chances of getting your student loans discharged in a bankruptcy proceeding or believe your discharge case was not handled fairly, it’s wise to contact a lawyer specializing in bankruptcy cases. An attorney can analyze your situation to prepare your documentation and present a convincing case to a bankruptcy judge.

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