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How Does Filing For Bankruptcy Affect my Federal Student Loans?

Updated: Apr 3, 2023

It's difficult, but not impossible, to discharge student loans in bankruptcy. Some borrowers have been able to discharge their student loans through bankruptcy with a little-known procedure.

Credit card debt, personal loans, vehicle loans, and mortgages are far easier to pay off than college loans. Student loans are included in the same category as child support obligations, taxes, and criminal fines under the United States Bankruptcy Code. Statistics on the rarity of student loan bankruptcy discharge are based on data provided by the Educational Credit Management Corporation (ECMC). When a borrower files for bankruptcy, ECMC is the guarantee agency that takes care of delinquent federal student loans.

According to ECMC, only 29 of 72,000 student loan debtors with current bankruptcy petitions in 2008 were able to achieve a full or partial discharge of their student loans.

That's 0.04 percent, or around 1 in 2,500 chances. You have a better percentage chance of getting struck by lightning than being able to discharge your school loans in bankruptcy. But to be fair, these low odds are partially due to very few borrowers including their student loans in their bankruptcy filing.

Qualified education loans, which include all federal education loans and many private student loans, cannot be discharged in bankruptcy unless this would “impose an undue hardship on the debtor and the debtor’s dependents” [11 USC 523(a)(8)].

You can only have your federal student loan discharged through bankruptcy if you file a separate action known as an "adversary proceeding". This requests that the bankruptcy court declare that repayment of your loans would impose “undue hardship on you and your dependents” as mentioned above under federal code 11 USC 523(a)(8).

In order to prove that hardship, you must declare Chapter 7 or Chapter 13 bankruptcy. Your creditors may be present to challenge the request. Bankruptcy courts do not have a one size fits all approach in determining undue hardship, but may look at the following factors to determine whether requiring you to repay your loans would cause an undue hardship:

  • Repayment of the loan would cause a severe and sustained reduction in you and your family’s standard of living.

  • You can prove that the hardship will continue for a majority of the repayment period.

  • You can prove that you have consistently made good faith efforts to repay the loan prior to declaring bankruptcy.

Depending on the terms of the bankruptcy court’s determination:

  • Your loan could be totally discharged

  • Your loan may be partially discharged, requiring repayment of some portion of your loan.

  • You may be denied discharge, but offered different repayment terms, such as a lower rate or a different repayment program.

If the bankruptcy court does not discharge your loans, you still may have options to lower your payment. Many different repayment plans exist and switching to a plan that’s a better fit is usually possible.

Possible new changes to bankruptcy rules are being debated by the Biden Administration. Federal Student Aid chief operating officer Richard Cordray told members of Congress at a House Committee on Education and Labor hearing recently that the Department of Education's current treatment of federal student loan bankruptcy cases is unworkable. He stated, "The procedure does not work well." "It needs to be overhauled... and we're committed to doing so." According to Forbes.

If you have questions about filing an Adversary Proceeding, speak with your Bankruptcy attorney. Contact TitanPrep if you would like to discuss your repayment plan options or change your repayment plan.



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