Discharging Student Loans in Bankruptcy: Steps and Requirements

Student loans can be a heavy burden for many borrowers, especially when combined with bankruptcy. It’s no surprise that many people consider applying for a student loan discharge in bankruptcy. Although the process is complex, it is not impossible. Under certain conditions, discharging student loans in bankruptcy is possible. Here are the requirements and a straightforward guide on how to apply.

Requirement to Apply for Discharging Student Loans

To qualify for discharging your loans through bankruptcy, you must prove ‘undue hardship’ which refers to the condition below.

1. Present Inability

You must show that repaying your loans would prevent you from maintaining a minimal standard of living, such as rent, food, medical bills, and utilities taking up all income, leaving no room for loan payments.

2. Future Inability 

Your financial hardship is likely to continue for a significant portion of the repayment period because:

• The debtor is 65 or older.
• The debtor has a disability or chronic injury impacting their income potential.
• For at least 5 of the last 10 years, the debtor has been unemployed.
• The debtor has failed to obtain the degree for which the loan was procured.
• The loan has been in a payment status other than ‘in-school’ for at least ten years.

Also Read : 8 Smart Ways on How to Avoid Student Loan Default

3. Good-Faith Effort

You must prove you made genuine efforts to repay before filing bankruptcy. Here steps show that you’ve acted in good faith.

• Submitting a loan payment.
• Applying for a deferment or forbearance (other than in-school or grace period deferments).
• Applying for an IDRP plan.
• Applying for a federal consolidation loan.
• Responding to outreach from a servicer or collector.
• Responding to communications from a loan servicer or debt collector.
• Actively engaging with the Department of Education or their loan servicer to explore payment plans, forbearance or deferment options, or loan consolidation.
• Actively engaging with a third party they believed could help them manage their student loan debt.

If you feel you qualify, you need to prepare proof that shows your current finances and that paying the loans would impose undue hardship, such as:

• Loan records (NSLDS / servicer statements) and balances.
• Recent pay stubs and tax returns, plus medical records if relevant.
• Monthly budget: rent/mortgage, utilities, food, childcare, transportation, insurance, required loan payments, and dependent information.

Also Read : Should You Refinance Your Student Loans? Pros, Cons, and Key Tips

Process to Apply for Discharging Student Loan

Here is the step-by-step process of discharging a student loan in bankruptcy.

• Decide which bankruptcy chapter to file (Chapter 7 or Chapter 13). Chapter 7 is a liquidation-style case that is shorter and may discharge most unsecured debts quickly. Meanwhile, Chapter 13 is a 3–5 year repayment plan, often used when Chapter 7 isn’t available or to protect assets.
• File the bankruptcy case before, or at the same time as, starting the adversary proceeding to challenge student loans.
• Collect proof to show your current finances and that paying the loans would impose undue hardship. 
• File an adversary proceeding, which is a formal complaint filed in the bankruptcy court asking the court to determine that the student loan debt is dischargeable.
• Prove “undue hardship” in court with the legal test and complete the attestation form.
• The Assistant United States Attorney (AUSA) will review your attestation form and any evidence you include. Then, make a non-binding recommendation to the bankruptcy judge. The DOJ also evaluates whether you meet the undue hardship standard.
• Finally, wait for the court’s decision. Possible outcomes include full discharge (a court finds undue hardship and discharges the debt), partial discharge (you may discharge part of a loan), and denial (the judge finds no undue hardship or the loan remains payable).

If your loans are discharged, servicers must stop collections and update your credit reports. Just in case, keep copies of the court order and demand compliance. 

However, if your request is denied, you can explore alternatives such as income-driven repayment plans, loan rehabilitation (for defaulted federal loans), consolidation, negotiating with private lenders, or consulting with your attorney about next steps.

Also Read : Claiming the Student Loan Interest Tax Deduction: Steps and Requirements

Are You Ready to Apply for Discharging Student Loans in Bankruptcy?

Discharging student loans in bankruptcy is challenging but not impossible. You must prove undue hardship and go through a separate court process. Thus, it is important to gather complete documentation such as loan records, income proofs, tax returns, medical records if relevant, and a detailed monthly budget to clearly show your situation. 

Moreover, it also helps you to keep evidence of repayment attempts, like enrolling in income-driven repayment plans or seeking deferment, if your application is denied. 

If you’re struggling with overwhelming debt, it may be worth consulting a bankruptcy attorney to explore your options. Even if your loans aren’t fully discharged, you may still benefit from restructuring your repayment through bankruptcy.

So, please know your rights, understand the process, and seek professional guidance to find the best financial path forward.