Discharge Private Student Loans in Bankruptcy: Guide

Higher education costs add up fast. U.S. student loan debt totals nearly $1.78 billion. Private loans make up less than 10% of that massive number.

Federal student loan borrowers get more repayment options. You can use income-based plans, forbearance, or deferment to lower payments. Private student loan borrowers rarely have these choices.

Qualify for Chapter 7 and Eliminate Private Student Loans

Proving undue hardship requires strong legal arguments in adversary proceedings. Speak with a bankruptcy attorney today to evaluate your private student loan discharge options and build your case.

Check Bankruptcy Eligibility

You might wonder if bankruptcy can help with overwhelming private student loan debt. The answer is complicated but sometimes yes.

Private student loan debt can be discharged in Chapter 7 or Chapter 13 bankruptcy. You must file an adversary proceeding after your bankruptcy case starts. Then you prove that repaying the debt causes undue hardship.

What Counts as a Private Student Loan?

Private student loans come from banks and financial institutions. Sometimes courts treat them as qualified education loans. Other times they’re just personal loans.

For a loan to qualify as an education loan, you must use it solely for qualified higher education expenses. Those expenses include specific costs at eligible schools.

Qualified costs include:

Tuition and fees
Room and board
Books and supplies
Required equipment and materials
Transportation

Eligible schools include most accredited public and private colleges. For-profit institutions count too.

The U.S. Department of Education doesn’t issue or back private loans. Defaulting on private loans triggers different consequences than federal loan defaults.

How Bankruptcy Treats Student Loans

Student loan debt is unsecured, just like credit cards. But bankruptcy law treats student loans differently than other unsecured debt.

Credit card debt gets discharged easily in Chapter 7. Student loans require extra work.

You must file an adversary proceeding with the bankruptcy court. These proceedings look like civil lawsuits, not standard bankruptcy cases.

Understanding the Brunner Test

Most federal courts use the Brunner Test to decide student loan discharges. The test comes from the case Brunner v. New York State Higher Education Services Corp.

Courts use this test to measure undue hardship. You must pass to discharge your loans.

Most states use the Brunner Test. Exceptions include Maine, Massachusetts, New Hampshire, Rhode Island, Puerto Rico, Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Missouri, and Arkansas.

The test has three parts. You must pass all three.

Part One: Minimal Living Standards

You must prove extenuating circumstances create hardship. Paying your student loan prevents you from maintaining minimum living standards.

Each court defines minimal living standards differently. The interpretation varies by location.

Part Two: Ongoing Hardship

Your hardship must continue for most of the repayment term. Predicting future financial struggles is difficult.

Courts interpret hardship requirements differently. Proving ongoing hardship is easier if you’re over 65 or permanently disabled.

Part Three: Good Faith Efforts

You must show good faith effort to repay your loans. Bankruptcy courts interpret this requirement differently.

Most courts want proof you’ve tried finding employment. They look for efforts to maximize income and minimize expenses. You should make at least one payment or attempt negotiating with your lender.

Options When You Can’t Pay Private Student Loans

Federal borrowers get income-based plans and loan forgiveness options. Private borrowers don’t have these protections.

You can refinance to lower your interest rate or monthly payment. Debt settlement might work if you can offer a large lump sum.

If you’re struggling with credit cards and student loans, professional guidance helps. Speaking with a bankruptcy attorney for free can clarify your options.

Missing payments damages your credit report. Your credit score drops when you default.

Managing Federal and Private Student Loans Together

Many borrowers carry both federal and private student loans. Department of Justice policy changes from late 2022 help federal loan discharge.

You might discharge federal loans more easily than private ones. The requirements are clearer now for federal student debt.

You still need to meet undue hardship standards. But the DOJ clarified the process for federal loans.

Filing Bankruptcy for Private Student Loans

Discharging private student loans through bankruptcy takes work. You need solid evidence of undue hardship.

Many people hire experienced bankruptcy attorneys for these cases. The adversary proceeding functions like a lawsuit. You need strong legal arguments.

Success rates vary by jurisdiction and individual circumstances. Courts evaluate each case differently.

Your chances improve with documented financial hardship. Medical conditions, age, and employment history all matter. Courts want complete financial pictures.

Alternatives to Bankruptcy

Bankruptcy isn’t your only option for private student loan relief. Explore alternatives before filing.

Refinancing can reduce your interest rate significantly. You might extend the repayment term to lower monthly payments. Private lenders offer various refinancing options.

Debt settlement negotiations might reduce your total balance. You typically need a lump sum to settle. Lenders want substantial payments upfront.

Credit counseling helps you organize finances. Professional counselors create manageable payment plans. They negotiate with creditors on your behalf.

Protecting Your Financial Future

Student loan problems affect your entire financial life. Your credit score suffers from missed payments.

Defaulted loans stay on credit reports for years. Future borrowing becomes expensive and difficult. Employers and landlords check credit histories.

Taking action early prevents long-term damage. Address payment problems before defaulting. Communicate with lenders about hardship situations.

Bankruptcy provides relief when other options fail. The process offers a fresh financial start. Discharged debt gives you room to rebuild.

Understanding your rights helps you make informed decisions. Private student loans have different rules than federal loans. Know what protections apply to your situation.

Frequently Asked Questions

What is the Brunner Test for student loan discharge?

The Brunner Test is a three-part standard used by most bankruptcy courts to determine undue hardship. You must prove you cannot maintain minimal living standards while paying loans, your hardship will continue for most of the repayment period, and you made good faith efforts to repay the debt.

How do I discharge private student loans in bankruptcy?

You must first file Chapter 7 or Chapter 13 bankruptcy, then file a separate adversary proceeding with the bankruptcy court. In this proceeding, you prove that repaying your private student loans causes undue hardship under the Brunner Test or your jurisdiction's standard.

Can I discharge federal and private student loans together?

Yes, you can attempt to discharge both types in bankruptcy. Federal student loans may be easier to discharge thanks to 2022 Department of Justice policy changes that clarified undue hardship requirements for federal debt.

What qualifies as a private student loan for bankruptcy purposes?

A private student loan must be used solely for qualified higher education expenses at eligible institutions. Expenses include tuition, fees, room and board, books, supplies, equipment, and transportation at accredited post-secondary schools.

What happens if I default on private student loans?

Defaulting damages your credit score and appears on your credit report for years. Private lenders may sue you for the debt. Unlike federal loans, private loans lack income-based repayment options and forgiveness programs.

Can You Discharge Private Student Loans in Bankruptcy?