Student Loans and Bankruptcy: Your Rights and Real Options

Federal student loans can be discharged in bankruptcy. You already know that sounds impossible. The myth is that student debt sticks with you no matter what. The reality is more nuanced.

About 41% of borrowers who filed adversary proceedings to discharge federal loans between 2017 and 2021 succeeded. That's not great odds, but it's not zero. And as of late 2022, the Department of Justice changed how it evaluates these cases, making discharge more accessible if you meet specific criteria.

This guide covers what you need to know: which loans can be discharged, how the process works, and what happens if bankruptcy isn't the right move.

Which Student Loans Can You Discharge in Bankruptcy?

Not all student debt is treated the same in bankruptcy court.

Federal Direct Loans held by the Department of Education are eligible for discharge if you file an adversary proceeding and prove undue hardship. This includes Direct Subsidized, Direct Unsubsidized, Direct PLUS, and Direct Consolidation Loans.

Federal Family Education Loans (FFEL) can also be discharged, but only if the Department of Education holds them. If a private lender or guaranty agency owns your FFEL loan, the process is trickier. You may need to consolidate into a Direct Loan first.

Private student loans follow the same undue hardship standard, but private lenders tend to fight harder. They have more to lose and fewer internal guidelines pushing them toward settlement.

Parent PLUS loans are treated like any other federal Direct Loan. If you took out a PLUS loan for your child's education and you're drowning in payments, you can pursue discharge if you meet the undue hardship test.

What Is the Undue Hardship Standard?

To discharge student loans in bankruptcy, you must prove that repaying them creates undue hardship. This is a higher bar than proving you can't afford other debts.

Most courts use the Brunner test, which asks three questions:

• Can you maintain a minimal standard of living while making loan payments?
• Will this situation persist for most or all of the repayment period?
• Have you made good faith efforts to repay the loans before filing bankruptcy?

If you answer "no" to the first question and "yes" to the second and third, you have a shot.

The 2022 DOJ guidance gives bankruptcy attorneys and judges clearer benchmarks. You're more likely to qualify if you meet any of these:

• You're over 65 and have less than $100,000 in retirement savings.
• You've been in repayment for at least 10 years and your income is below 225% of the federal poverty line.
• You have a permanent disability that limits your earning capacity.
• You've made regular payments for years but your balance hasn't decreased.

These aren't automatic approvals, but they signal to the DOJ that settlement or discharge makes sense.

How to Discharge Student Loans: The Adversary Proceeding

Filing bankruptcy doesn't automatically discharge student loans. You need to take an extra step called an adversary proceeding.

An adversary proceeding is a separate lawsuit within your bankruptcy case. You file a complaint against your loan servicer, explain why undue hardship applies, and ask the court to discharge the debt.

Here's the process:

Step 1: File your Chapter 7 or Chapter 13 bankruptcy. List your student loans as debts. Your case will pause collections, but it won't discharge the loans unless you take the next step.

Step 2: File an adversary proceeding complaint. You can do this pro se (without a lawyer) if you're dealing with federal loans. The DOJ's 2022 guidance encourages simpler proceedings for borrowers who clearly meet the hardship criteria.

Step 3: Gather evidence. You'll need to show your income, expenses, medical records (if disability is a factor), and proof that you've tried to repay the loans. Bank statements, tax returns, and payment histories all matter.

Step 4: Wait for a response. The loan holder (usually the DOJ for federal loans) reviews your case. Under the new guidelines, they may agree to discharge part or all of the debt without a trial.

Step 5: Attend a hearing or negotiate a settlement. If the DOJ doesn't agree to discharge, you'll go before a bankruptcy judge. You may also negotiate a partial discharge or modified repayment plan.

The entire process can take 6 to 12 months. If you win, the discharged loans disappear. If you lose, you're still responsible for the debt.

What If You Don't Qualify for Discharge?

Most borrowers won't meet the undue hardship test. That doesn't mean you're out of options.

Income-driven repayment plans cap your monthly payment at 5% to 10% of discretionary income. After 20 or 25 years of payments, the remaining balance is forgiven. (Note: forgiven amounts may be taxable.)

If you work in public service, the Public Service Loan Forgiveness (PSLF) program wipes out your loans after 10 years of qualifying payments. You must work for a government or nonprofit employer and make 120 on-time payments under an income-driven plan.

Total and Permanent Disability (TPD) discharge erases federal loans if you have a disability that prevents you from working. You'll need documentation from a doctor, the Social Security Administration, or the Department of Veterans Affairs.

Chapter 13 bankruptcy doesn't discharge student loans, but it can restructure your other debts. If credit card bills and medical debt are eating up your paycheck, Chapter 13 may free up cash for student loan payments. Learn how to file bankruptcy and what to expect.

Private Student Loans: A Different Game

Private lenders don't follow the DOJ's 2022 guidelines. They fight harder because they have more to lose and fewer political incentives to forgive debt.

That said, private loans use the same undue hardship standard. If you can prove you'll never earn enough to repay them, discharge is possible. You'll likely need a lawyer for this.

Private loans also have statutes of limitations. If a lender hasn't sued you within 3 to 10 years (depending on your state), the debt may be unenforceable. Bankruptcy doesn't restart that clock.

Filing Without a Lawyer: Is It Smart?

You can file an adversary proceeding pro se if your case is straightforward. The DOJ's new process makes this easier for federal loans.

But hiring a lawyer increases your odds. Bankruptcy attorneys know how to frame hardship arguments, negotiate with the DOJ, and handle courtroom procedure. If you're dealing with private loans or a complicated financial situation, the cost is usually worth it.

Expect to pay $2,000 to $5,000 for an adversary proceeding on top of your bankruptcy filing fees. Some attorneys offer flat rates; others charge hourly.

What Happens After Discharge?

If the court discharges your student loans, the debt is gone. You don't owe it. Your credit report will show the loan as "discharged in bankruptcy," which is better than "in default."

Your credit score will take a hit from the bankruptcy itself (expect a 130 to 200 point drop), but that's true whether or not you discharge student loans. The discharge doesn't add extra damage.

Federal loans won't reappear. The IRS won't seize your tax refunds. The Department of Education won't garnish your wages. You're free.

When to Start the Process

If you're considering bankruptcy for student loans, start now. Gather your loan statements, income records, and proof of hardship. Take our bankruptcy screener to see if you qualify for Chapter 7 or Chapter 13.

You don't need to wait until your loans are in default. You can file an adversary proceeding as soon as your bankruptcy case opens.

The longer you wait, the harder it gets to prove good faith repayment efforts. Courts want to see that you tried. Missing a few payments won't disqualify you, but years of ignoring your loans might.

Final Step: Talk to Someone

Student loan discharge is possible, but it's not simple. The rules changed in 2022, and courts are still figuring out how to apply them. A bankruptcy attorney can review your situation and tell you whether adversary proceedings make sense or whether you're better off with income-driven repayment.

If you're drowning in debt and student loans are part of the problem, bankruptcy may give you room to breathe. Other debts discharge automatically. Student loans require an extra fight, but the fight is winnable.