Unlike most dischargeable debts, student loans are not automatically terminated in bankruptcy. To discharge student loans, you must also start an adversary proceeding. Here’s how it works:
1. Seek Legal Counsel
Although it is possible to file alone, working with an experienced attorney is recommended. The bankruptcy process for student loans is complicated and involves complex paperwork.
2. File for Bankruptcy
It is necessary to fill out and submit a bankruptcy petition to the appropriate bankruptcy court. If you have a closed case, you may file to reopen it. Your legal counsel will advise you on which bankruptcy type is the most suitable for your case.
3. Initiate an Adversary Proceeding
After filing for bankruptcy, you must file for an adversary proceeding, which is a bankruptcy court’s version of a civil lawsuit. In an adversary proceeding, you bring a complaint against your loan lender, usually the Department of Education or a private entity.
According to 11 USC § 523(a)(8), student loan debt is only dischargeable if you prove it imposes undue hardship on you and your family.
To demonstrate undue hardship, you must satisfy the following conditions:
- You wouldn’t be able to keep a minimal standard of living if forced to repay the loan.
- Your financial difficulties will likely persist in the future.
- You made good-faith efforts to repay your debt, such as making several student loan payments.
Bankruptcy Types for Student Loan Discharge
When filing for student loan discharge in bankruptcy, you can choose Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy
This type of bankruptcy involves selling your assets to pay creditors. Chapter 7 discharges in bankruptcy don’t automatically include student loans, so an adversary proceeding must be held to determine whether you are eligible for the discharge.
To be eligible for Chapter 7 bankruptcy, you must have a lower income than the state median.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also called wage earner’s plan, allows you to develop a debt repayment plan tailored to your financial situation. This plan will help you pay all or part of your debts within a three or five-year repayment period. After completing your repayment plan, the remaining debts may be discharged.
To file for Chapter 13, you must have a regular income.
Federal vs. Private Student Loan Debt Discharge in Bankruptcy
Both federal and private student loans can be discharged in bankruptcy, but the process varies slightly. According to new student loans bankruptcy litigation guidance by the Department of Justice, borrowers can discharge their federal student loans more easily and quickly by filing an Attestation Form with their local Assistant U.S. Attorney (AUSA). If the AUSA recommends a discharge to the court, your adversary proceeding may be concluded quickly and favorably.
When it comes to private loans, the bankruptcy court judge will make a judgment based solely on your arguments. It may be crucial to have a skilled bankruptcy attorney represent you in court to ensure your arguments are communicated efficiently.
