Personal Bankruptcy and Student Loans

By Cara O'Neill, Attorney
Bankruptcy can help you lower your student loan payment and, in exceptional cases, wipe it out completely.

Going to college is often the first step before settling down, buying a house, and having children. Unfortunately, racking up student loan debt is often part of the process. When your new salary doesn’t cover your monthly student loan payment, what are you to do? Filing for bankruptcy can lighten your student loan burden.

Student loans are nondischargeable, which means they don’t go away. Even so, bankruptcy can help. You might be able to reduce your payment—or, in exceptional cases, wipe out your student loan debt completely—by filing for bankruptcy.

Wiping Out Student Loans

While it’s possible to get rid of student loan debt, it’s not easy. You must file an adversary proceeding (a lawsuit) in bankruptcy court. Most courts use the “undue hardship” test to determine whether it would be unfair for you to repay your loan. To be successful, you’ll need to prove the following:

  • Paying your student loan will prevent you from providing yourself and your family with a minimal standard of living. Emphasis on “minimal.”
  • Your financial situation will be unlikely to change.

Don’t be surprised if you can’t meet the undue hardship test. It’s meant to provide relief to those who would be impoverished otherwise—such as people suffering from a total and complete disability.

Even if you could meet the test, you might have a simpler avenue available. You can request the discharge of certain types of student loans—but not all—by directly petitioning the U.S. Department of Education. However, it’s a good idea to first consult with an attorney who can advise you of all your options.

Find out more about proving the undue hardship exception in Can I Get Rid of My Student Loan Debt in Chapter 7 Bankruptcy?

Reducing Student Loan Payments

When your student loan payment is unmanageable, asking your student loan servicer to reduce your monthly payment is a good first step. It doesn’t always work, of course. When the servicer won’t agree, you can force it to accept a more reasonable payment plan by filing for Chapter 13 bankruptcy. Here’s how Chapter 13 works to reduce payments:

  • You make monthly payments with your “discretionary income”—the amount of money you have left over after paying your household expenses. (See How Can Chapter 13 Help Me With My Nondischargeable Debt?)
  • Your payment plan is either three or five years depending on your income.
  • You’re responsible for your remaining student loan balance after completing your plan.

Your Chapter 13 plan will include all of your debt, not just your student loan. A bankruptcy attorney is in the best position to tell you whether Chapter 13 bankruptcy is a good fit given your needs and how much you can expect to pay.

For more on reducing student loan debt, see Can Filing for Chapter 13 Bankruptcy Help Me Lower My Student Loan Payment?

Questions for Your Attorney

  • If I ask the U.S. Department of Education to wipe out my student loan and my request is denied, will I still be able to file an adversary proceeding in bankruptcy court?
  • Do the courts in my state use the undue hardship test or another standard?
  • Will the court discharge my student loan if I’m partially disabled?

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