Understanding Student Loan Bankruptcy Regulations – To file for student loan bankruptcy, you will first need to file for Chapter 7 or Chapter 13 bankruptcy. Then, you will need to file an adversary proceeding (AP) to have your student loans considered for discharge. Basically, you have to prove that repaying the loan would cause undue hardship.

In some cases, you can get student loan repayment, but the process is more complicated than for other types of debt. Filing for student loan bankruptcy does not guarantee that your student loan will be discharged.

Understanding Student Loan Bankruptcy Regulations

Understanding Student Loan Bankruptcy Regulations

First, you must file for Chapter 7 or Chapter 13. Then, you will need to take the additional step of filing an adversary proceeding. Falling behind on payments can have a significant negative financial impact on your financial life, including lowering your credit score. If you’re thinking about defaulting on your payments and filing for student loan bankruptcy, weigh the pros and cons.

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As of March 9, 2022, you can pause an active bankruptcy case, as requested by the U.S. Department of Education to the U.S. Department of Justice. This break is still in effect from the beginning of August 2023.

Filing for Chapter 7 or Chapter 13 bankruptcy requires completing extensive paperwork and disclosing your assets, income, debts and expenses. The bankruptcy court will appoint an impartial trustee to meet with your creditors to verify your debts. You must also undergo credit counseling.

In a Chapter 7 bankruptcy or liquidation, the trustee will sell your non-exempt property. Exempt property varies by state, but often includes your home, vehicles and other valuables. The trustee uses the proceeds to pay your creditors as much of your debt as possible, and the court discharges the rest.

To file for Chapter 7, you must not have had another Chapter 7 bankruptcy in the past eight years. Also, your current monthly income must fall below the state median income or must pass a means test. Certain debts cannot be discharged, such as taxes, alimony and child support. Once your case is over, you can apply for student loan discharge.

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Many people turn to Chapter 13 bankruptcy or reorganization when they can’t pass the Chapter 7 means test. They can also file if they don’t want to lose their home to foreclosure.

Chapter 13 involves creating a repayment plan that uses up to 100% of the debtor’s disposable income to repay creditors within three to five years. Repayment is supervised by the administrator, who collects the monthly payment from the debtor and redistributes it to the creditors as specified in the repayment plan.

Bankruptcy stays on your credit history for up to 10 years. Your credit score will likely drop significantly with bankruptcy.

Understanding Student Loan Bankruptcy Regulations

With student loans, you have to take an extra step in filing for bankruptcy. The adversary process determines whether your debt should be discharged.

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The “complaint” is also included in the documentation of the counter-procedure. The complaint includes administrative details, such as your bankruptcy case number and the reasons you are seeking to discharge your student loans in bankruptcy, or the circumstances of your undue hardship.

Student loans have stricter discharge requirements, which are described in section 523(a)(8) of the US Bankruptcy Code.

If you file for Chapter 7, you can file a lawsuit against a rival creditor right after you file for bankruptcy. If you’ve already gone through Chapter 7 bankruptcy and your case is closed, you may still be able to file an adversary for student loan repayment, depending on where you live.

If your Chapter 7 case is already closed, you must first file for bankruptcy reopening. This is procedural and does not restart the bankruptcy or eliminate the discharge you may have already received for your debt.

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In a Chapter 13 bankruptcy case, when you can file an adversary proceeding also depends on the rules of the bankruptcy court where you live. Regardless of when you file, your student loan nightmare won’t be over if you win the adversary case. This is because you must wait until you complete the necessary Chapter 13 plan payments and earn a discharge order for your other debts before your student loans can be discharged.

If you are allowed to file an adversary case early, you may be able to finish the case sooner and get a decision on your student loans. The table below compares Chapter 7 and Chapter 13 bankruptcy.

Must have enough disposable income to repay the debt over three to five years; aggregate secured and unsecured debt may not exceed $2,750,000

Understanding Student Loan Bankruptcy Regulations

The collection activity stops; all debts are erased except those deemed by the court to be non-dischargeable and those that can never be repaid, such as taxes and alimony

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The collection activity stops; can stop foreclosure and give you more time to catch up on your mortgage payments; the remaining amount of unsecured debts paid off after the completion of the priority and secured debt repayment plan

To get your student loans discharged, you must show that defaulting on them would cause you undue hardship and you must meet certain conditions.

Your student loan creditors—which can include payday lenders, servicers, and collection agencies, depending on the type of loan you have and how far behind you are—must meet specific requirements.

Most states use the Brunner test to determine what constitutes an undue hardship. Essentially, the test assesses a person’s current financial situation, their likely future situation, and whether they have made a good faith effort to pay off their loans.

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A few states use a totality of the circumstances test. It doesn’t take into account whether you’ve made good faith efforts to pay off your loans, such as consistently trying to get a job, maximize income and minimize expenses.

The common thread in these examples is that it is unlikely that your situation will improve in a way that would allow you to pay off the debt. Additionally, your expenses, which the bankruptcy court will examine, should only include reasonably priced necessities, not luxury or non-essential purchases such as restaurant meals, brand name clothing, vacations, or even giving money to your independent adult child.

Your student loan servicer may choose not to oppose your request to discharge your loans in bankruptcy court if they believe your circumstances present an undue hardship or if they want to avoid the costs of litigation.

Understanding Student Loan Bankruptcy Regulations

For federal loans, the Department of Education allows a loan holder to accept an undue hardship claim if the costs of litigation exceed one-third of the total amount owed on the loan, including principal, interest and collection costs. Private student lenders are likely to apply similar logic.

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If you plan to file an undue hardship federal student loan repayment claim based on a physical or mental impairment, you may not need to go to bankruptcy court. You may qualify for an automatic discharge under total and permanent disability.

Other circumstances in which you may be able to avoid bankruptcy court and file for an administrative discharge include death, school closure, false certification, unpaid refunds, and borrower defense.

Federal student loan debt cancellation, announced by the Biden administration in August 2022 but later ruled unconstitutional by the U.S. Supreme Court on June 30, 2023, would be an option for certain student loan borrowers, including:

To receive debt relief under this policy, individuals and married couples could not have an income of more than $125,000 and $250,000, respectively. Borrowers could even potentially receive a refund for payments made during the COVID-19 payment hiatus.

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In response to the Supreme Court ruling, Biden announced changes to student loan administration, including lowering the required minimum payment from 10% of discretionary income each month to 5% each month for undergraduate loans. Borrowers still have several paths based on their career and consistency with income-based repayments to receive debt forgiveness.

On June 30, 2023, the Supreme Court ruled that the Biden administration did not have the authority to cancel up to $20,000 of federal student debt per borrower.

The three-year postponement of student loan repayment and interest also ends. Student loan interest will resume from September 1, while mandatory payments will be due from October.

Understanding Student Loan Bankruptcy Regulations

You can potentially get out of student loans through bankruptcy, though not always. The process is complicated. Before you decide to get out of student loans through bankruptcy, consider consulting with a financial advisor to review your alternatives.

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The easiest way to get rid of student loans is to pay them off. There are various programs and resources that can help you manage your student loan debt burden. If you think you’re having trouble paying off your student loans, contact your lender to help you get over the burden. You can potentially discharge your student loans in bankruptcy, but the process is complex.

For qualified borrowers, student loans can be paid off after 10 years if the borrower meets the specified public service requirements.

Going through the bankruptcy process does not guarantee a concrete result. The bankruptcy court may agree that paying off your student loans would cause an undue hardship and pay off your loans in full. Or, you may still have to pay back what you owe, which may now include collection costs, additional interest accrued, court fees and attorneys’ fees. Alternatively, you may have your loans partially repaid or restructured.


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