What Kind of Loan Is Rarely Forgiven in Bankruptcy: Student Loan Discharge Guide

Loan Dischargeability Comparison

Why Student Loans Receive Special Treatment

Congress made student loans non-dischargeable through deliberate policy choices, not accident. The reasoning evolved over decades and reflects assumptions about education debt, borrower ability to repay, and protecting the student loan system.

Originally, student loans were dischargeable like any other debt. In the 1970s, Congress became concerned about potential abuse. Stories circulated about students filing bankruptcy immediately after graduation to discharge loans before starting lucrative careers. Whether this actually happened at meaningful scale is debated, but the perception drove policy.

The Bankruptcy Reform Act of 1978 made student loans non-dischargeable for five years after becoming due. Later amendments extended this to seven years. The 1998 Higher Education Act amendments removed the time limit entirely, making student loans non-dischargeable unless the debtor proves undue hardship.

Private student loans were originally treated like ordinary consumer debt. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act extended non-dischargeability to private student loans, treating them the same as federal loans.

The Undue Hardship Standard

To discharge student loans in bankruptcy, you must prove undue hardship through an adversary proceeding, which is essentially a lawsuit within your bankruptcy case. This requires more than showing that repayment is difficult or inconvenient. Undue hardship is a high legal standard.

Most courts apply the Brunner test, established in a 1987 Second Circuit case. This test requires proving three things: first, that you cannot maintain a minimal standard of living for yourself and your dependents if forced to repay the loans; second, that additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period; and third, that you made good faith efforts to repay the loans.

The first prong examines your current finances. Courts look at income, expenses, and what remains after paying necessities. The second prong is often the killer - you must show that your inability to pay will persist, not just that it exists today. Courts look for factors like permanent disability, chronic illness, lack of marketable skills, or advanced age.

Some Courts Use Different Standards

Not all courts follow Brunner strictly. The Eighth Circuit uses a totality of circumstances test that considers all relevant factors without rigid prongs. In 2022 and 2023, the Department of Justice and Department of Education issued guidance encouraging more flexible approaches to student loan discharge.

The Adversary Proceeding Process

Seeking student loan discharge requires filing a complaint initiating an adversary proceeding, which is a separate lawsuit within your bankruptcy case. This is not part of the standard bankruptcy process. Most bankruptcy filers never file adversary proceedings.

The complaint must identify the loans, explain your circumstances, and allege facts supporting undue hardship. Your student loan servicers become defendants and can contest your allegations. They have lawyers and resources to fight discharge.

Discovery follows, where both sides exchange documents and information. You may need to provide years of tax returns, pay stubs, expense records, and medical documentation. If the case does not settle, it proceeds to trial before the bankruptcy judge.

The entire process typically takes six months to a year or longer. Legal fees for adversary proceedings add significantly to bankruptcy costs. Some attorneys charge $5,000 to $15,000 or more for student loan discharge litigation. Partial discharge is possible - the judge might determine that some portion of your loans should be discharged while the remainder survives.

Alternatives to Discharge Through Bankruptcy

Given the difficulty of discharging student loans in bankruptcy, most borrowers pursue other options. Income-driven repayment plans, loan forgiveness programs, and strategic forbearance often produce better outcomes than adversary proceeding litigation.

Income-Driven Repayment plans cap federal loan payments at a percentage of discretionary income. After 20 or 25 years of qualifying payments, remaining balances are forgiven. Payments can be as low as zero dollars monthly for very low income borrowers.

Public Service Loan Forgiveness eliminates federal loan balances after 120 qualifying payments while working for eligible employers. Government employees, nonprofit workers, and others in public service qualify. Recent reforms have made PSLF more accessible.

Teacher Loan Forgiveness provides up to $17,500 in forgiveness for teachers working in low-income schools for five consecutive years. Disability discharge is available for borrowers who are totally and permanently disabled.

Filing Bankruptcy With Student Loans

Even if you cannot discharge student loans, bankruptcy can help by eliminating other debts and freeing up money for loan payments. Many people file bankruptcy to address credit cards and medical bills while continuing to pay student loans.

Chapter 7 eliminates unsecured debts in a few months, leaving you with only non-dischargeable obligations like student loans. With credit card payments gone, you may be able to afford income-driven student loan payments you could not manage before.

Chapter 13 requires addressing student loans in your repayment plan. You cannot ignore them entirely. But other debts may receive reduced payments while student loans receive what you can afford, with no discharge of the balance.

After bankruptcy, you remain responsible for student loans. You can pursue income-driven repayment, apply for forgiveness programs, or continue making standard payments. The discharge of other debts may make these payments more manageable through life after bankruptcy.

Frequently Asked Questions

Are private student loans treated differently than federal in bankruptcy?
No. Since 2005, both federal and private student loans require proving undue hardship for discharge in bankruptcy.

How much does it cost to try discharging student loans in bankruptcy?
Adversary proceeding attorneys typically charge $5,000 to $15,000 or more depending on complexity of your case.

What percentage of people succeed in discharging student loans?
Studies suggest around 40% of those who file adversary proceedings obtain some relief, but most people never file.

Can I discharge parent PLUS loans in bankruptcy?
Parent PLUS loans are student loans subject to the same undue hardship standard as loans in your own name.

Should I file bankruptcy if most of my debt is student loans?
Possibly. Discharging other debts may make student loan payments affordable even if the loans themselves survive bankruptcy.