To file for student loan bankruptcy, you will first need to file for Chapter 7 or Chapter 13 bankruptcy. You will then need to file an adversary proceeding (AP) to have your student loans considered for discharge. Essentially, you must prove that repayment of the loan would cause undue hardship.

How Student Loan Bankruptcy Works

You can get student loans discharged in some cases, but the process is more complex than it is with other types of debt. Filing for student loan bankruptcy does not guarantee that your student loan will be discharged.

First, you must file for bankruptcy under Chapter 7 or Chapter 13. Then, you'll need to take an additional step of filing an adversary proceeding. This is essentially a lawsuit related to a bankruptcy case that is filed in the same court.

Falling behind on your payments can have a significant negative financial impact on your financial life, including lowering your credit score. If you're considering failing to make payments and filing for student loan bankruptcy, weigh the pros and cons.

How to File for Bankruptcy

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

What Is Chapter 7 Bankruptcy?

In a Chapter 7 bankruptcy, or liquidation, the trustee will sell off your nonexempt assets. Exempt assets vary by state but may include your home, vehicles, and some other possessions. The trustee uses the proceeds to pay your creditors as much of your debt as possible, and the court discharges the rest.

To file Chapter 7, you must not have had another Chapter 7 bankruptcy discharged in the past eight years. Additionally, your current monthly income must fall below the state median income or you must pass a means test.

Certain debts cannot be discharged, such as taxes, alimony, and child support. Once your case is complete, you can file for student loan discharge.

What Is Chapter 13 Bankruptcy?

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 entails creating a repayment plan that uses up to 100% of a debtor’s disposable income to repay creditors within three to five years. Repayment is supervised by the trustee, who collects a monthly payment from the debtor and distributes it to the creditors as outlined in the repayment plan.

The bankruptcy court will determine your new monthly debt payments, including your new student loan payment.

Filing for Student Loan Bankruptcy

Before filing for bankruptcy, consider:

• Potential you may owe more: The bankruptcy court will decide how much you will pay each of your creditors each month. If you have other debts that are a higher priority than student loans, you could end up accruing additional interest on your student loans.
• If your only debt is your student loan: If you have no other debt, you are not likely to win your case to discharge your student loan.
• Your loan type: You may have a better chance of discharging or settling a private student loan in bankruptcy than a federal student loan. The reason is that federal student loans offer income-driven repayment plans, while private student loans do not. Private loans that cover more than what is considered a "qualified higher education expense," such as living expenses, may be fully dischargeable in bankruptcy court.
• Filing costs: You must pay court filing fees unless the court waives them. If you have an attorney, the court might find that your circumstances aren’t dire enough to warrant a student loan discharge. Consider a lawyer who might take on your case pro bono or for a low fee. Visit the American Bar Association or your state bar association's website to find a lawyer.

Filing an Adversary Proceeding

With student loans, you must take the additional step of filing an adversary proceeding in a bankruptcy filing. The proceeding determines whether your debt should be discharged.

The adversary proceeding paperwork was recently simplified by a Nov. 2022 action. Previously, establishing undue hardship was complicated, time-consuming, and often easily rejected. The new process condenses the filing into 15 pages that establish the debtor's current and future economic state and how paying the loans would impact their life. Since its reformation, more than 99% of borrowers were granted at least partial discharge of their student loan debts.

Student loans have stricter requirements for discharge, which are described in section 523(a)(8) of the U.S. bankruptcy code.

When to File an Adversary Proceeding: Chapter 7

If you file for Chapter 7, you can file the adversary proceeding right after filing your bankruptcy case. If you've already gone through Chapter 7 bankruptcy and your case has been closed, you may still be able to file an adversary proceeding to get your student loans discharged, depending on the state where you live.

When to File an Adversary Proceeding: Chapter 13

In a Chapter 13 bankruptcy, when you can file an adversary proceeding depends on the bankruptcy court rules in your state.

Regardless of when you file, your student loan nightmare will not be over if you win the adversary proceeding. You must wait until you've completed the necessary Chapter 13 plan payments and earned your discharge order for your other debts before your student loans will be discharged.

If you are allowed to file the adversary proceeding early, you might get the proceeding over with sooner and obtain a decision on your student loans. The table below compares Chapter 7 and Chapter 13 bankruptcy.

Comparing Bankruptcy Options
	Chapter 7	Chapter 13
Who can file	Current monthly income must fall below the state median or you must pass a means test	Must have enough disposable income to make debt payments over three to five years; total secured and unsecured debt must not exceed $2,750,000
Relief available	Collection activity stops; all debts are wiped out except those the court deems nondischargeable and those that are never dischargeable, such as taxes and child support	Collection activity stops; can stop foreclosure and give you more time to catch up on mortgage payments; remaining balance on unsecured debts discharged after completing repayment plan on priority and secured debts
Timeframe for basic bankruptcy proceeding	As little as a few months	Three to five years
Timeframe for possible student loan discharge	As little as a few months	Three to five years
Cost	Court filing fees + attorney fees + assets you're required to give up	Court filing fees + attorney fees + assets you're required to give up
Effect on credit	Can stay on credit report for up to 10 years	Seven years after discharge; some creditors may view Chapter 13 more favorably than Chapter 7
Assets you get to keep	Varies by state	Varies by state

Undue Hardship and Student Loan Discharge

To have your student loans discharged, you must demonstrate that not having them discharged would cause you to experience undue hardship and you must meet specific conditions.

Your student loan creditors—which may include lenders, servicers, and collection agencies, depending on the types of loans you have and how far behind you are on payments—must also meet specific conditions.

The Totality of Circumstances Test

A few states use the totality of the circumstances test. This doesn't consider whether you’ve made a good-faith effort to repay your loans, such as consistent attempts to obtain employment, maximize income, and minimize expenses.

What Constitutes Undue Hardship

A court might agree that repaying your loans would be an undue hardship if:

• You can’t maintain a minimal standard of living for yourself and any dependents
• The hardship will continue throughout the loan’s repayment period
• You sincerely tried to repay your loans before filing for bankruptcy

A "minimal standard of living" is open to interpretation by the courts, but it may mean;

• Your income has been below the federal poverty level for several years and doesn’t show signs of improving
• You’re on public assistance or dependent on a family member
• You have a debilitating mental or physical illness or permanent injury
• You have a child with a serious illness who requires round-the-clock care
• Divorce reduced your household income
• Disability checks are your only source of income
• You depend on public assistance to support your children
• You support a spouse who was seriously and permanently injured in a car accident or developed a total disability

The common thread in these examples is that your situation is unlikely to improve in a way that would allow you to repay your debt. In addition, your expenses, which the bankruptcy court will scrutinize, should include only reasonably priced necessities, not luxuries or nonessential purchases like restaurant meals, brand-name clothing, vacations, and even giving money to your independent adult child.

Federal Loans and Hardship

Your student loan holder may choose not to oppose your petition to have your loans discharged in bankruptcy court if it believes your circumstances constitute undue hardship or simply to avoid the cost of litigation.

For federal loans, the Department of Education allows a loan holder to accept an undue hardship claim if the costs to pursue the 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.

Alternatives to Filing for Bankruptcy

If you plan to claim undue hardship for federal student loan repayment based on physical or mental impairment, you may not need to go to the bankruptcy court. You may qualify for automatic discharge under Total and Permanent Disability Discharge.

Other circumstances where you might avoid bankruptcy court and apply for administrative discharge are death, a closed school, a false certification, an unpaid refund, and borrower defense to repayment.

Forbearance, deferment, and loan rehabilitation are the other options for managing difficult federal student loan payments.

Federal Programs to Relieve Student Debt

A much wider plan to cancel federal student loan debt held by millions of borrowers was struck down by the U.S. Supreme Court on June 30, 2023.

In response to the Supreme Court's ruling, Biden announced key changes to federal student loan administration that open up the prospect of relief for many:

• If you cannot afford to pay your federal student loan, you may be eligible to lower your monthly payments through the SAVE program. This is an income-based program that reduces your payment to the amount you can afford. That can be $0 per month in some circumstances.
• Loan forgiveness is available for some public service workers, non-profit employees, and disabled people.

The Bottom Line

Going through the bankruptcy process doesn’t guarantee a specific result. The bankruptcy court could agree that repaying your student loans would cause undue hardship, and either partially or fully discharge your loans. Or, you may still have to repay what you owe, plus collection costs, the additional accrued interest, court fees, and attorney fees. However, with a new streamlined process for substantiating undue hardship, more people are finding debt relief for student loans through bankruptcy. Before you file, weigh the pros and cons of bankruptcy, including its potential outcomes and impact on your credit score. Meanwhile, explore other alternatives for renegotiating the terms of your student loans with the federal government or your private lender.