In this article:
Filing bankruptcy can allow you to eliminate debt and get a clean slate financially, either through a structured payment plan or a liquidation of your assets. Many types of debt can be discharged in bankruptcy, but student loans typically aren't included on that list.
It is possible to include student loan debt in your bankruptcy filing and get it approved by the court if you can prove undue hardship, but that process can be difficult. If you're struggling financially and are thinking about filing bankruptcy, here's how to know if your student loans are eligible.
Are Student Loans Dischargeable in Bankruptcy?
In bankruptcy, you can discharge many different types of debt. That includes unsecured debt like credit cards, personal loans, collection accounts, medical bills, business loans and, in some cases, even student loans.
By law, bankruptcy trustees are required to prioritize certain types of debts in regard to when they get paid. For example, things like child support and alimony, unpaid taxes and criminal fines must be paid before your unsecured debts, which are considered non-priority.
While priority debts generally cannot be discharged, you may be able to be released from accounts included in the non-priority category. Student loans are counted among non-priority debts, but you'll still have a really hard time discharging them in Chapter 7 or Chapter 13 bankruptcy. The only exception is if you can prove that your student debt has caused undue hardship to yourself and your dependents.
When Do Student Loans Qualify Under Undue Hardship?
The criteria for demonstrating undue hardship can vary from court to court, and meeting the standard in any court can be difficult. However, there are two tests courts generally use to determine whether you're experiencing undue hardship from your student loans. Depending on the court, there may be other tests that are used to determine whether you qualify to include student loans in your bankruptcy discharge, but these are the most common:
With the Brunner Test, you can discharge your student loans in bankruptcy if all three of these factors are present:
- Poverty: If you're required to continue making your loan payments, you'll be unable to maintain a minimal standard of living for yourself and your dependents based on your income and expenses.
- Persistence: Your current financial situation likely won't change for a significant portion of your student loan repayment period.
- Good faith: You've made a good faith effort to repay your student debt.
Totality of the Circumstances Test
With this test, the court will review all of the relevant factors of your situation to determine whether an undue hardship exists. It's up to the court to decide based on the information you provide.
Alternative Ways to Pay Off Student Loan Debt
Because it can be almost impossible to get rid of student loans in bankruptcy, take some time to consider other ways to get relief or to pay off your debt with more affordable terms.
Income-Driven Repayment Plans
If you have federal loans, you may be able to qualify for up to four different income-driven repayment plans. These plans reduce your monthly payment to a percentage of your discretionary income and also extend your repayment term to up to 25 years.
Those changes to your loan terms may help you get a handle on your student loan payments without filing bankruptcy. Also, if you still have a balance when the repayment term ends, the remainder will be forgiven—though keep in mind that the amount will also be considered taxable income to you.
Getting on an income-driven repayment plan will result in more interest paid over the life of your loans, but it can provide immediate financial relief.
Deferment or Forbearance
If you're experiencing temporary financial difficulties, you may be able to qualify for deferment or forbearance of your student loan payments. These options are available with federal student loans and even many private student loans.
Deferment and forbearance allow you to pause your monthly payments for a certain period, which can vary based on the lender and your situation. Just keep in mind that interest typically still accrues on your loans, and you'll need to make up those payments later. But if you need relief now, it can be worth it.
Student Loan Refinancing
Whether you have federal or private loans, you may benefit from student loan refinancing. This process involves replacing your current loans with a new one from a private lender. Depending on your credit and financial situation, you may be able to qualify for a lower interest rate than what you're paying now.
Also, many student loan refinance lenders offer repayment terms of up to 20 years, which means you could potentially extend your term and benefit from a reduced rate.
Before you look into refinancing, understand that if you do it with federal loans, you'll lose access to federal benefits, including the income-driven repayment plans and loan forgiveness options listed above. Also, you typically need great credit and a strong income to qualify for the lowest refinance rates.
But if you do qualify, or you can get a creditworthy cosigner to help you qualify, refinancing could make a difference with your budget.
Take Steps Early to Avoid Credit Damage
If you're not sure you can make your student loan payments, take steps early to avoid missing payments and default. Both of these scenarios can damage your credit score, making it difficult to qualify for refinancing or get approved for favorable credit terms in the future.
As you decide the best path forward for you, monitor your credit regularly to understand how your actions impact your credit score. Credit monitoring can also help you spot potential issues before they cause significant damage.