Can You File Bankruptcy on Student Loans?
Student loans are generally not wiped out in bankruptcy unless the borrower shows that repaying them would impose an "undue hardship" on the borrower and the borrower's dependents. To make that showing, a debtor files a separate lawsuit within the bankruptcy case, called an adversary proceeding, and the bankruptcy judge decides. In November 2022, the Justice Department, working with the Department of Education, announced an attestation-form process for deciding whether to support discharge of federal student loans in these cases.
What the law says
- The Bankruptcy Code excepts from discharge, unless excepting the debt would impose an undue hardship on the debtor and the debtor's dependents, an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution. 11 U.S.C. § 523(a)(8) (via Cornell LII)
- The same exception covers an obligation to repay funds received as an educational benefit, scholarship, or stipend, and any other educational loan that is a qualified education loan as defined in section 221(d)(1) of the Internal Revenue Code, incurred by a debtor who is an individual. 11 U.S.C. § 523(a)(8) (via Cornell LII)
- U.S. Courts lists certain education loans among the debts that are not discharged in a Chapter 7 case. U.S. Courts, Chapter 7 - Bankruptcy Basics
- The Justice Department says debtors who seek to discharge student loans must prove in a separate "adversary proceeding" that paying their student loans would impose an "undue hardship," and that the bankruptcy judge makes the final decision whether to grant a discharge. U.S. Department of Justice, Student Loan Discharge Guidance - Fact Sheet (November 17, 2022)
- Under the process the Justice Department announced in November 2022, debtors complete an attestation form; the Justice Department, in consultation with the Department of Education, reviews it, applies the factors courts consider in the undue-hardship inquiry, and decides whether to recommend discharge, and it will consider supporting a partial discharge where appropriate. U.S. Department of Justice, Student Loan Discharge Guidance - Fact Sheet (November 17, 2022)
- To assess present ability to pay, Justice Department attorneys use IRS expense standards; if a debtor's expenses equal or exceed the debtor's income, the Department will determine that the debtor lacks a present ability to pay. U.S. Department of Justice, Student Loan Discharge Guidance - Fact Sheet (November 17, 2022)
- To assess future ability to pay, the Department presumes a debtor's circumstances are not likely to change if factors such as retirement age, disability or chronic injury, protracted unemployment history, lack of degree, or extended repayment status are present. U.S. Department of Justice, Student Loan Discharge Guidance - Fact Sheet (November 17, 2022)
- On good faith, the Department looks at reasonable efforts to earn income, manage expenses, and repay; a debtor will not be disqualified for past non-payment if other evidence of good faith exists, or for not enrolling in an income-driven repayment plan if the debtor was deterred or gives a reasonable explanation. U.S. Department of Justice, Student Loan Discharge Guidance - Fact Sheet (November 17, 2022)
- The Department of Education's Dear Colleague Letter GEN-23-13 says FFEL and Perkins loan holders may follow the Justice Department process and should typically ask borrowers to provide information using the attestation form included with the November 2022 guidance. U.S. Department of Education, Dear Colleague Letter GEN-23-13 (updated August 5, 2024)
- As updated August 5, 2024, GEN-23-13 says a holder may concede discharge if the costs of defending the adversary proceeding exceed one-third of the amount owed, correcting an earlier version that indicated a higher threshold. U.S. Department of Education, Dear Colleague Letter GEN-23-13 (updated August 5, 2024)
FAQ
Are student loans automatically discharged in bankruptcy?
No. Under 11 U.S.C. § 523(a)(8), covered education loans are excepted from discharge unless excepting them would impose an undue hardship on the debtor and the debtor's dependents.
Do private student loans count?
The statute's exception reaches loans made, insured, or guaranteed by a governmental unit or under programs funded by a governmental unit or nonprofit institution, and also any other qualified education loan as defined in the Internal Revenue Code incurred by an individual.
What test do courts use for undue hardship?
The Department of Education's letter describes jurisdictions that follow either the Brunner test (from a 1987 Second Circuit decision) or a "totality of circumstances" test.
Can only part of a student loan be discharged?
The Justice Department says that even where the factors may not support a complete discharge, it will consider supporting a partial discharge where appropriate.
Related
- Chapter 7 vs. Chapter 13 Bankruptcy
- Do I Need a Lawyer for Bankruptcy?
- How Long Does Bankruptcy Stay on Your Credit Report?
- How Much Does a Bankruptcy Lawyer Cost?
- How Much Does It Cost to File Bankruptcy?
- How Often Can You File Bankruptcy?
- What Happens When You File for Bankruptcy?
- What Is Chapter 13 Bankruptcy?
- What Is Chapter 7 Bankruptcy?
- Bankruptcy by state
General legal information, not legal advice. Laws change and local rules can differ; check the linked official source or talk to a lawyer about your situation.