Private student loans can be discharged in bankruptcy (meaning you are released from your debt obligation), but the process is notoriously difficult. Not only does the bankruptcy filing require an additional step called an adversary proceeding, but you’ll also need to prove your student loans cause undue hardship by passing certain tests. The process can also be expensive and damage your credit for years to come.
However, successful applicants may see their private student loan debt discharged or temporarily restructured with more affordable payments. Read on for a closer look at bankruptcy and private student loans so you have a clear understanding of your options.
Private vs Federal Student Loans
Student loans can help pay for the cost of higher education. According to the Education Data Initiative, the average cost of a year at college is currently $38,270, including books and daily living expenses.
A few points to note:
• Private student loans come from private lenders, such as banks, credit unions, and online loan providers.
• Federal student loans, on the other hand, are issued by the Department of Education, specifically its office of Federal Student Aid. Federal loans have some benefits and protections that private loans don’t have. These can include deferment and student loan forbearance (a temporary postponement or reduction of your student loan payments).
Student Loans and Bankruptcy
There are different paths for student loans to potentially be discharged in bankruptcy. In the past, federal student loan discharge through bankruptcy was even more difficult than private loan discharge. However, the Department of Justice announced changes to the process in November 2022 that simplified the process for federal loan borrowers.
Under the new rules, borrowers can complete a 15-page attestation form to show that their student loans cause undue hardship. The Department of Justice also introduced new guidelines for undue hardship to make them more fair and consistent for debtors.
Private student loans don’t qualify for this new process, but it’s still possible to include them in a bankruptcy proceeding. It may be best to consult a student loan lawyer who can help guide you through the process.
💡 Quick Tip: Ready to refinance your student loan? You could save thousands.
Private Student Loans and Bankruptcy Laws
Private student loan discharge is available under section 523(a)(8) of the Bankruptcy Code — if the debtor can prove that their student loans cause undue hardship. While undue hardship has historically not been clearly defined, most courts use what’s known as the Brunner Test to make this determination (more on this below).
Whether or not student loans are discharged also depends on the type of bankruptcy you file for, meaning whether it’s Chapter 7 or Chapter 13.
• Chapter 7 bankruptcy: Chapter 7 bankruptcy can discharge your debts after liquidating your assets. This type of bankruptcy stays on your credit report for 10 years.
• Chapter 13 bankruptcy: Chapter 13 bankruptcy reorganizes your debts with a new repayment plan that spans three to five years. Some unsecured debts (such as credit card debt or personal loans) may be discharged at the end of the plan, but take note: You’ll still be responsible for your student loans — the remaining balance, plus interest. Collections will be paused during this time, but your loans will accrue interest. Chapter 13 bankruptcy stays on your credit report for seven years.
There are a few other circumstances where private student loans can be discharged, according to the Consumer Financial Protection Bureau. For instance, you may qualify for private student loan discharge if:
• You borrowed more than your school’s cost of attendance.
• You got loans for a school that wasn’t eligible for Title IV funding, such as an unaccredited college or trade certificate program.
• Your loans were used to cover fees and living expenses while you studied for a professional exam, such as the bar exam.
• Your loans were used to cover fees, living expenses, or moving costs while you were in medical or dental residency.
• Your loans were made while you were attending school less than half-time.
If any of the above scenarios apply, you may be able to discharge your private student loans in bankruptcy without having to meet the more difficult standard of the Brunner Test.
Recommended: Student Loan Guide
Understanding the Bankruptcy Process
Your first step in declaring bankruptcy is filing for bankruptcy and paying the associated fees.
• The initial filing fee for Chapter 7 bankruptcy (which focuses on unsecured debt, such as credit card debt and personal loans) is usually around $338.
• The filing fee for Chapter 13 bankruptcy (which typically involves discharging unsecured debt while catching up on secured debt, such as a mortgage) is likely to be around $313.
In addition, attorney costs can vary and may add up to thousands of dollars. While this can be a steep expense, an experienced attorney or student loan lawyer can help you navigate the process, as well as help you determine which type of bankruptcy fits your financial circumstances.
What Is the Process of Getting Student Loans Discharged?
To get private student loans discharged through bankruptcy, you’ll need to take the extra step of filing an adversary proceeding. This is basically a lawsuit within the bankruptcy. Essentially, the adversary proceeding means that you’re suing your student loan lender or servicer. The fee to file an adversary proceeding is often around $350.
After filing this adversary proceeding and outlining your case, a judge will determine whether you qualify for private student loan discharge through bankruptcy.
What Is the Brunner Test?
Most courts use the Brunner Test to determine whether your student loans cause undue hardship. The Brunner Test has three main guidelines:
1. Repaying your student loans would make it impossible for you to maintain a minimal standard of living.
2. Your financial difficulties are likely to persist throughout a significant portion of your student loan repayment period.
3. You’ve shown a good-faith effort to pay back your student loans in the past.
Some courts use an alternative test called the totality of circumstances test. With this test, the court considers your past, present, and future financial resources, along with your living expenses and other relevant circumstances. Basically, they look at your entire financial picture to determine whether your student loans cause undue hardship and would qualify for discharge through bankruptcy.
Recommended: Finding Student Loans and Scholarships
The Takeaway
Discharging private student loans through bankruptcy is difficult, but not impossible if you can prove they cause undue financial hardship in your life. Filing and qualifying for bankruptcy is complex, however, so you’ll likely need to hire an attorney to help you navigate the process. It’s also a last resort, as it can be expensive and can negatively impact your credit for years to come.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
Can private student loans be discharged through bankruptcy?
Private student loans can be discharged through bankruptcy if you can prove they cause undue hardship. When filing for bankruptcy, you’ll have to take the extra step of filing an adversary proceeding, which is essentially an additional lawsuit against your student loan lender or servicing company.
Are private student loans treated differently in bankruptcy?
Private student loans are treated differently than other types of debt in bankruptcy. You’ll have to meet a higher standard to have them discharged, typically the Brunner Test or totality of circumstances test. Plus, student loans aren’t discharged at the end of a Chapter 13 repayment plan — you’ll still owe your remaining balance, plus interest.
What are the requirements to prove undue hardship?
The requirements to prove undue hardship vary, but you typically must show the following: repaying your student loans would prevent you from maintaining a minimal standard of living, your financial situation is likely to persist throughout your repayment period, and you’ve made a good-faith effort to pay back your student loans.
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