Published in: Student Loans | Dec. 21, 2019

This Is Why Student Loans Are Rarely Discharged in Bankruptcy

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Think you can file for bankruptcy and shake that student debt? Think again.

U.S. borrowers owe a collective $1.59 trillion in student loans, and if you're one of them, you may be struggling to keep up with your monthly payments. In fact, you may be so burdened by that debt that you're actually contemplating filing for bankruptcy in an effort to shed it for good.

But not so fast -- although filing for bankruptcy can help you wipe away certain types of debt, student loans are rarely dischargeable in a bankruptcy filing. Here's why. 

A stressed young woman in a busy crowd covering her face with her hands.

Image source: Getty Images

How Chapter 7 bankruptcy works

To even contemplate the idea of ditching your student debt via a bankruptcy filing, you'll need to qualify for Chapter 7, a personal liquidation, as opposed to Chapter 13, a reorganization of your personal debts. Being approved to file Chapter 7 is tough enough in its own right because you need to pass the means test, which is a measure of how your income compares to the median income for a household your size in your state. 

But let's assume that you do pass the means test and therefore qualify for a Chapter 7 bankruptcy. If that's the case, you'll need to prove that you truly don't have the financial ability to pay back your student loans in your lifetime, or that doing so will constitute an undue financial hardship. 

In fact, most bankruptcy courts follow what's known as the Brunner Test to determine whether your student loans are eligible to be discharged. Under that test, you must prove that:

  • You've made every reasonable effort to repay your debt
  • You won't manage to maintain a reasonable standard of living if you're forced to repay your debt
  • The current financial hardship involved in repaying your debt won't go away for the majority of your repayment period

Now here's what all of this actually means. Unless you're really old, or you can't hold down a job due to a disability, you're likely to have a hard time getting a court to agree that your financial situation is unlikely to change in the future. Furthermore, there are many ways to interpret what a reasonable standard of living entails, and so a bankruptcy court may not care that you have to live in your parents' home till you're 40 or bunk with five roommates in a basement apartment to keep up with your debt. 

In other words, much of the above criteria is open to interpretation, and bankruptcy courts aren't too quick to let student loan borrowers off the hook. As such, student debt is generally considered not to be dischargeable in bankruptcy. 

A better way to cope with your debt

Not only are your odds of getting your student loans wiped out in bankruptcy really low, but bankruptcy is also generally a long, stressful, expensive process. One that can leave your credit score in very bad shape for years -- 10 years to be exact, if you file for Chapter 7, because that's how long such a filing will remain on your record. 

A better bet if you're struggling to repay your student debt? Explore your options for making your loans more affordable. If you took out federal loans, apply for an income-driven repayment plan, or see if you qualify for deferment or forbearance, both of which will allow you to pause your payments for a period of time. 

If you took out private loans for college, your options may be more limited, but reach out to your lender and ask for relief. Remember, your lender ultimately wants to get paid, and as such, may be willing to grant you some leeway, even if there's no official obligation to do so under your loan contract. 

Qualifying to file for Chapter 7 is difficult enough to begin with, and once you do, there's no guarantee you'll have your student debt wiped out. On the contrary -- the chances of that happening are extremely slim, so you're better off focusing your efforts on making that debt easier to manage until it's gone.

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