How are Student Loans Treated in Bankruptcy?

For the most part, student loans aren’t discharged by bankruptcy. However, there are some very difficult to pass exceptions to this rule.  Bankruptcy does delay the student loan payments for several months in Chapter 7 and years in Chapter 13.  The following is an analysis of whether you can qualify for an Undue Hardship exception.

Student Loans May Be Dischargeable if They Lead to Undue Hardship

Since Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, student loans are more difficult to discharge in bankruptcy than other types of debt. However, they can be discharged if the borrower can prove the loan causes undue hardship.

You would need to pass the Brunner test. The test has three prongs, and you must prove that:

  • You can’t maintain a minimal standard of living for yourself and your dependents based on your current income and expenses.
  • Your financial situation isn’t likely to change during your loan’s term.
  • You’ve made good faith efforts to repay the loan.

If you can prove all three circumstances apply to you, then your student loan may be dischargeable. But proving an undue hardship can be difficult, particularly if you have federal student loans.

Your Case Could Depend on Whether You Have Federal or Private Student Loans

Federal student loans include direct loans, Perkins loans and the discontinued Federal Family Education Loan Program.

All nonfederal loans are considered private student loans. Banks, credit unions, online lenders, schools and states may issue private student loans.  However, if even a dollar is funded by the government, then student loans are considered to be federal student loan

Truly Private Student Loans Are Exempt From the Undue Hardship Requirement

The need to prove undue hardship only applies to federal student loans, student loans that are funded by a nonprofit such as your school and qualified educational loans.

However, some private student loans may not fit the definition of a qualified loan, and therefore could be treated just like other types of unsecured debt during a bankruptcy.

The things that indicate if you have a private student loan are the following:

  • You attended an ineligible school. Federal Student loans are only offered at qualified schools.  If you attended an ineligible school, you would not have had the option.
  • You borrowed more than the school’s cost of attendance. Qualified student loans can only be used for educational expenses, such as tuition, fees, room, board and educational supplies. Therefore, the most you can borrow is the total value of the above.. If you were allowed to borrow more than this, then the entire loan might not be a qualified student loan.
  • You weren’t an eligible student.  If you never exceeded a half-time course load, you may not be an eligible student.

You may be able to get private student loans discharged through bankruptcy.

Truthfully, it is highly unlikely that you will get your student loans discharged, so please don’t get your hopes up.