Student Debt & Bankruptcy Information

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Content updated Nov. 13, 2023
Bankruptcy is an important financial tool with some weighty consequences, and the decision to file bankruptcy is serious. Under federal law, you have the right to declare bankruptcy relief from your creditors, which can include student debt. But this comes at the cost of hurting your credit for several years and racking up legal and court fees along the way. Student loan bankruptcy discharge is also more complicated and has more restrictions than discharging other forms of debt. Here’s a look at how it’s possible.

Can student loans be discharged in bankruptcy?

In the most extreme circumstances of financial hardship, declaring student loan bankruptcy could be a way to eliminate or reduce outstanding debts that you can no longer afford to pay. If you decide to file for bankruptcy, you’ll need to decide whether to file for Chapter 7 or Chapter 13 bankruptcy.

Under Chapter 7, you’ll need to prove you have little to no disposable income to cover your debts, and most unsecured debts will be wiped away. Chapter 13 is for debtors with more income who can afford to repay at least some of the debts back and includes a restructure and repayment of debts.

Both options will wipe away many of your consumer debts (like outstanding medical or credit card bills). In exchange, you might need to give up some property to help repay your debtors. In all, the process typically takes four to six months from the time you file until your bankruptcy is finalized and debts are discharged.

Unfortunately, however, the discharge order is unlikely to initially include student loans. Student loan debt is exempt from the same treatment unless you can prove an “undue hardship.” Chapter 13 bankruptcy can help provide relief from paying off your student loan debt in the short term with reduced monthly payments. But you’re still on the hook for whatever loan balance is left after your bankruptcy repayment period ends. Similarly, your student loan debt won’t be wiped away if you file for Chapter 7 bankruptcy, and you’ll still be responsible for paying.

How student loan bankruptcy discharge works:

It’s generally very difficult to discharge your student loans through a normal bankruptcy process. Initially, the court will deny your request to discharge your student loans in the bankruptcy filing. Next, you’ll have to file a separate adversary proceeding, or a “Complaint to Determine Dischargeability”, under your Chapter 7 or Chapter 13 bankruptcy case.

Under this proceeding, you’ll have to prove that student loans create “undue hardship.” You can typically hire a law firm to do this on your behalf for a few hundred dollars. According to the Federal Student Aid website, most courts use the Brunner Test to determine undue hardship.

To qualify, you must meet all of the following criteria:

- You wouldn’t be able to maintain a minimal standard of living if you were forced to repay the loan.

-Your financial hardship would continue for a significant portion of the repayment period if you were forced to repay the loan.

-You’ve made a good-faith effort to repay the loan before you filed for bankruptcy.

If your student debt is from attending a for-profit trade school, you also might be able to raise a defense related to the school’s practices. If you can prove there was a breach of contract, deceptive practices, or similar issues, you could have a better chance of convincing a judge to discharge student loans.

Most bankruptcy filers never try to discharge student loans.

Consider student loan repayment and forgiveness options.

It’s important to consider all of your options when trying to eliminate your student loan debt, like income-based repayment (IBR) or even student loan forbearance. You can also get your student loan debt discharged via Public Service Loan Forgiveness by working in certain industries that provide public benefit, like teaching.

Bankruptcy is already a complicated, intrusive, and hard process. Attempting to have student loans discharged in bankruptcy can make it more costly and difficult. Before declaring bankruptcy and trying to fight against a system that’s designed not to discharge your student loan debt, be sure to research your other debt repayment options for student debt relief.

Note that if your student loans are in default, your tax refund (if there is one) will be taken to pay them. If your income is low, you can be considered current on your student loans by Income Based Repayment and may have $0 or $5 per month repayments.

More Information:

Cancellation of student debt income: In Revenue Procedure 2015-57 the IRS announced that it will not assert that certain taxpayers, whose federal student loans are discharged under the Department of Education’s “Defense to Repayment” discharge process, must recognize gross income as a result of this discharge process. This Revenue Procedure identifies the statutory provisions under which taxpayers whose federal student loans are discharged under the Department of Education’s “Closed School” discharge process may exclude the discharged amount from gross income.

The Department of Education (ED) has begun a process for settling and discharging federal student loans taken out to finance attendance at schools owned by Corinthian Colleges. The ED estimates over 50,000 Corinthian borrowers may be eligible for discharges under this program. The treatment provided in this revenue procedure applies to any taxpayer who took out federal student loans to finance attendance at a school owned by Corinthian Colleges, Inc. that are discharged under the Closed School discharge process or the Defense to Repayment discharge process.

The IRS will not assert that these taxpayers must increase their taxes owed in the year of a discharge as a result of either discharge process if in a prior taxable year they received an education credit under §25A (Hope and Lifetime Learning credits) or took a deduction under §221 (interest on education loans) or §222 (qualified tuition and related expenses).