Navigating Student Loan Discharge After Chapter 7 Bankruptcy

The weight of student loan debt can be a significant burden for many individuals and families. As of 2019, student loan debt in the United States stood as the second-largest category of debt, only surpassed by mortgage debt, with approximately $1.5 trillion owed by 44 million borrowers. When facing such overwhelming debt, it's natural to explore options like bankruptcy for debt relief. While bankruptcy offers discharge for many debts, student loans are often treated differently. This article explores the complexities surrounding student loan discharge after filing for Chapter 7 bankruptcy.

Understanding Unsecured Debt and Student Loans

Most debts qualify for a discharge in bankruptcy. However, some debts are not dischargeable in bankruptcy regardless of whether you file for debt relief under Chapter 7 or Chapter 13. Unsecured debts are debts that are not secured by collateral. Student loans are generally classified as unsecured debts. Unlike a mortgage secured by real estate or a car loan secured by a vehicle, student loans do not require borrowers to provide a lien on their property. This means that the lender cannot seize specific assets if the borrower fails to repay the loan.

Chapter 7 Bankruptcy and Student Loans: The Hardship Discharge

Even though your student loan may not be dischargeable in a Chapter 7 or Chapter 13 bankruptcy case, you might still greatly benefit from filing for bankruptcy relief. In a few cases, a debtor can obtain a hardship discharge for a student loan by filing a Chapter 7 bankruptcy case. While it's generally difficult to discharge student loans in bankruptcy, it's not impossible. A debtor can obtain a hardship discharge for student loans in a Chapter 7 bankruptcy case under certain conditions. The court has established three elements that a debtor must meet to discharge student loans in bankruptcy.

To discharge student loan debt through Chapter 7 bankruptcy, borrowers typically must demonstrate "undue hardship." In practice, to meet this test you must be in dire financial circumstances with little chance that they will improve. This legal standard is challenging to meet, but it is possible.

The Brunner Test: Defining Undue Hardship

Most Texas courts will use the Brunner Test to make the decision whether you would suffer undue hardship under the law. Most courts use the Brunner Test to determine if student loan debt is dischargeable in Chapter 7. The requirements are referred to as the Brunner test because they are taken from the appellate case of Brunner vs. New York State Higher Education Services Corp. Most court cases cite Brunner v. New York State Higher Education Services Corp. (October 14, 1987, #41, Docket 87-5013) for a definition of “undue hardship”. Brunner v. NY HESC (In re Brunner), 831 F.2d 395 (2d Cir. 1987), aff’g 46 B.R. 752 (Bankr. S.D.N.Y. 1985). That decision adopted the following three-part standard for undue hardship:

The Brunner Test consists of three primary prongs:

Inability to Maintain a Minimal Standard of Living: Based on the individual’s income and expenses, it would not be possible for the borrower to maintain a minimal standard of living for the individual and his family by continuing to pay the loan. That the debtor cannot both repay the student loan and maintain a minimal standard of living based on current income and expenses. A minimal standard of living is close to the poverty level, not middle class living.
Persistence of Financial Hardship: The current financial situation is not likely to change throughout the repayment period. That this situation is likely to persist for a significant portion of the repayment period of the student loans. The second element of the standard requires the debtor to provide evidence of additional exceptional circumstances that are strongly suggestive of a continuing insurmountable inability to repay, such as being disabled or having a disabled dependent. A serious physical or mental illness might also qualify. An inability to work in one’s chosen profession does not necessarily preclude being able to work in another field. There must be a “certainty of hopelessness”, meaning that there is no chance of any future improvement in the borrower’s financial situation.
Good Faith Effort to Repay: The borrower has made a good faith effort to pay back the student loans. That the debtor has made good faith efforts to repay the loans. The third element of the standard requires the borrower to have demonstrated a good faith effort to repay the loans. Filing for a bankruptcy discharge immediately after graduation is generally not considered a good faith effort to repay the loans. However, there might be extenuating circumstances, such as the debtor suffering brain damage in a car accident shortly after graduation. The court will consider the totality of the circumstances. The court will consider whether the debtor made payments on the loans when he or she had some income available and obtained a deferment or forbearance when his or her income was insufficient. The court will also consider whether the debtor took advantage of various alternatives to bankruptcy, such as the extended repayment, income-contingent repayment and income-based repayment plans, and whether the debtor tried to increase available financial resources, such as seeking a better job and reducing expenses.

The first element of the standard usually involves the lowest monthly payment available to the borrower, namely the monthly loan payment under Income Contingent Repayment, as opposed to standard ten-year repayment. (With the introduction of Income Based Repayment on July 1, 2009, it is expected that the courts will switch to this repayment plan as it usually yields a lower monthly payment and meshes well with the 150% of poverty line threshold for a bankruptcy fee waiver.) Note that if the borrower has multiple student loans and could afford to repay some but not all of them, the court will generally discharge only those loans that exceed the borrower’s ability to repay. It is also possible that a court will discharge part of a loan instead of the entire loan. The poverty line is often (but not always) used as a threshold for a minimal standard of living, since it is defined as the income level at which the family has no discretion concerning how to use the income. However, the courts will generally examine all of the debtor’s expenses to ensure that they are minimal and necessary. The existence of discretionary expenses may derail an undue hardship petition, as borrowers are expected to make sacrifices to repay their debts.

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Courts have differing views on what constitutes a basic standard of living and good faith effort to repay the student loan.

Totality of the Circumstances Test

Although most courts use the Brunner Test to determine if student loan debt is dischargeable in Chapter 7, a few courts will use the more lenient Totality of the Circumstances Test.

The Chapter 13 Alternative

The same is true in a Chapter 13 case. Even though your student loan may not be dischargeable in a Chapter 7 or Chapter 13 bankruptcy case, you might still greatly benefit from filing for bankruptcy relief. However, in the Chapter 13 case, some of your student loan debt is paid through the Chapter 13 bankruptcy plan, and the student loan is in forbearance. You are not required to make your student loan payments during your Chapter 13 case, but you will owe the loan and the interest when your bankruptcy case is complete.

Under Chapter 13 bankruptcy, student loans are considered “non-priority unsecured debts,” similar to credit cards or medical bills. This means your repayment plan does not require you to pay the debts in full during the bankruptcy period. This can help you reduce the monthly amount you are paying towards your student loans and delay the deadline for repayment. Chapter 13 bankruptcy also puts a stay on collection actions.

Obtaining Student Loans After Bankruptcy

Bankruptcy won't affect your ability to get most types of federal student loans. Bankruptcy does not prevent you from getting a student loan, but it may make applying for a loan a little harder. Whether a prior bankruptcy will affect your ability to get new student loans depends on the type of loan you're applying for. The Bankruptcy Reform Act of 1994 changed the law so that a student who had a federal loan previously discharged in bankruptcy can get a new loan more easily.

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Federal Student Loans

For federal student loans and grants other than PLUS loans, the government won't consider your creditworthiness by running a credit check to determine your eligibility. Most federal loans are based on financial need, not credit history. That means even if you’ve filed Chapter 7 - or are currently in a case - you can still apply for grants, loans, and other aid through FAFSA. Most people who’ve filed Chapter 7 have no trouble qualifying for federal student loans. The main federal student loan program is called the Direct Loan Program. Direct Unsubsidized LoansDirect Consolidation Loans

The Bankruptcy Code (the law that governs the bankruptcy process) protects bankruptcy filers from being discriminated against when it comes to federal student loan eligibility. Under the law, government agencies that offer student aid (loans or grants) can’t deny aid to someone who is in or has filed bankruptcy. The same rule applies to anyone in the business of offering loans that are guaranteed or insured under a student loan program from the federal government.

There are many different kinds of federal student aid, but the two broadest categories are aid that doesn’t have to be paid back and aid that does have to be paid back. Financial Aid You Don’t Have To RepaySome types of federal aid don’t have to be paid back. These usually come in the form of:✅ Grants✅ Scholarships✅ Work-study jobs These can be very helpful in offsetting the cost of college, but they don’t always cover the full cost of attendance. This is why many people turn to student loans to cover the difference.Financial Aid You Do Have To RepayThere are two main types of student loans:Federal student loans, which are backed by the federal governmentPrivate student loans, which are issued and backed by private financial institutions like banks and credit unionsRegardless of which type of student loan you get, you’ll have to pay it back, including interest, with a monthly payment during a set repayment period. 💻 To apply for federal student aid, simply complete the Free Application for Federal Student Aid (FAFSA) form. Department of Education, financial need is one of the primary eligibility requirements for most federal financial aid programs.

PLUS Loans

There are two types of PLUS loans, those taken out by parents who are borrowing money for their children's education and those taken out by graduate and professional students. The one exception to this is the parents PLUS loan. Parents applying for PLUS loans may be denied based on credit, and bankruptcy affects credit scores. In most cases, you can't get a PLUS loan if you have an adverse credit history. (34 C.F.R. § 682.201(b),(c), 34 C.F.R. Having a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a federal student loan debt, during the five years preceding the date of the credit report. (34 C.F.R. § 682.201, 34 C.F.R. 📈 The good news is that the impact to your credit score will decrease as your bankruptcy filing ages. And there are several things you can do post-filing to start improving your credit.

If you’re interested in a PLUS Loan but have credit issues, there may still be ways to qualify, like applying with an endorser (a co-signer) or documenting special circumstances.

You may be able to get a PLUS loan if you:

Get an endorser and complete PLUS Credit Counseling. An endorser is like a cosigner.
Show extenuating circumstances and complete PLUS Credit Counseling. Department of Education's satisfaction that the information causing the adverse credit decision is incorrect or you have extenuating circumstances relating to the adverse credit history. You need to show that the adverse credit decision was made in error, is missing important information, or is based on data that is now out of date.

Private Student Loans

Not all new student loans are issued by the federal government. Private loans are a different story. Private loans consider the credit score of the borrower more than federal loans do, and thus bankruptcy can make it more difficult to get a private loan. Banks and other financial institutions also lend money to students. Private student loan lenders act like other creditors, which means your credit history is very important to them. Private lenders typically run credit reports and check your credit score when deciding whether to loan you money and what interest rate you’ll get. Having a recent bankruptcy on your credit may negatively impact your chances of getting approved for a private loan or getting a loan at a decent interest rate for a while.

If you filed for bankruptcy within the past seven or ten years (bankruptcies drop off your credit reports after seven or ten years, depending on the type of bankruptcy), that will negatively affect your credit scores. The lower your scores, the less likely you'll qualify for a private student loan. Students will need to talk to lenders directly with proof that they no longer have the hardships they once did, but it can still take 7 to 10 years after filing before a bank or other private lender will consider someone for a loan.

To apply for private student loans, you’ll need to find a private lender and go through the application process with that lender. Each application process will vary depending on the terms of each lender or loan servicer.

Before you apply for a student loan that's based, at least in part, on your creditworthiness, get copies of your credit reports from each major reporting agency (Equifax, Experian, and TransUnion) from the Annual Credit Report Service at www.annualcreditreport.com. Then, review your reports to make sure they're accurate.

Adversary Proceeding: The Path to Discharge

Your student loans will not be automatically discharged if your bankruptcy is approved. You have to take special steps in the bankruptcy case to ask the judge to discharge your student loans. This is done by filing a petition for an adversary proceeding. The adversary proceeding, which is the first step to discharging your student loans in bankruptcy. 📃 You initiate the adversary proceeding by filing a complaint with the court clerk. A complaint is a formal legal document. Depending on which district you’re in, you may be able to file your complaint electronically. If you don’t file it electronically, you’ll need to submit it with a cover letter, which the court provides as a PDF form. 👉 If you qualify to file your case with Upsolve, our nonprofit will help you prepare this complaint paperwork.

After you file your bankruptcy case, you must take an additional step to start an adversary proceeding to have your loans discharged.

Include Your NSLDS Report

Important: Include Your NSLDS Report With Your Adversary Complaint!You must include a complete list of your student loans along with your adversary complaint. Department of Education in the proceeding. The point is to let the defendant - your lender - know about the adversary proceeding. Trustee of the Bankruptcy Filing District

Complete the Attestation Form

📃 Next, you’ll fill out an attestation form. This is the form that will be used to determine if you meet the undue hardship requirements. There are several main parts to this form as covered below. 👇The Attestation Form: Income and Expense InformationThe form begins by asking basic questions to gather some personal financial information, including:Income information, such as your household gross income, unemployment benefit payments, and Social Security paymentsExpense information, such as your basic living expenses, uninsured medical costs, payroll deductions, housing costs, transportation costs, and other necessary expenses, such as child careWhat you’ll need to answer these questions: It’s helpful to gather recent paystubs, bank statements, and unemployment or Social Security paperwork (if applicable) to help you fill out the income portion of this form. 💰 For the expenses, gather recent bills, including medical bills, insurance payments, your paystub (to see deductions), recent transportation bills and receipts (including for maintenance and gas). 🧾 If you use a credit card or debit card to pay your expenses, you can look at your recent transaction history to capture expenses that you may not keep receipts for, like groceries, housekeeping supplies, apparel, personal care products, gas for your car, or public transportation costs. 👶 Be sure to include expense information for your dependents as well.The Attestation Form: Information on Your Present Ability To Pay Your Student Loan DebtThe rest of the form asks for information related to the undue hardship standard by asking about your income and expenses.There’s a pretty simple formula to determine your ability (or inability) to make your monthly student loan debt payment: your gross income minus your allowed expenses. These expenses are detailed on the attestation form starting on page 5.You’ll tally your gross income and allowed expenses on your attestation form. If you run these numbers through the formula and it shows there is $0 remaining each month, this shows an inability to pay your student loan debt. 💡 If you have some income remaining, you may still be able to have some of your debt discharged. The AUSA will look at your loan payment to determine if you qualify for a partial discharge.The Attestation Form: Information on Your Future Inability To Pay Your Student Loan DebtThe attestation form will ask you a series of questions to get a sense of whether you’ll be able to repay your student loan debt in the future. The AUSA can presume you will not be able to repay your loans in the future if you meet any of the following criteria:Are 65 or olderHave a disability or chronic injury that impacts your ability to workHave been unemployed for five or more years in the last decadeDidn’t get a degree that the loan was meant to finance🗓️ The AUSA can also presume an inability to pay if your loan has been in repayment status for 10 years or more. These presumptions provide a more straightforward case to the AUSA, but they aren’t the only way to show an inability to pay. If your reason falls outside these presumptions, you can explain it in the space provided on the attestation form.The Attestation Form: Information Showing a Good Faith Attempt at RepaymentThe next portion of the attestation form helps the bankruptcy court determine whether you’ve made a good faith effort at student loan repayment.The DOJ cites several examples of evidence of good faith. To demonstrate good faith, you need to demonstrate that you’ve done one or more of the following:Made at least one student loan paymentApplied for or been approved for deferment or forbearanceApplied for or enrolled in an income-driven repayment planApplied for or received a federal consolidation loanContacted the loan servicer/lender or responded to a contact from the loan servicer or a collector regarding their repayment optionsContacted a third-party organization whose goal was to help the borrower manage their student loan debtTo demonstrate good faith, you must also show you’ve made an effort to work or find work and to maximize your income while minimizing expenses. Essentially, filers must show they have managed their debts and finances responsibly given their circumstances.

AUSA Recommendation and Court Decision

The AUSA will review your attestation form to assess whether they believe the undue hardship standard has been met. Then, the ASUA makes a recommendation to the bankruptcy court handling the case. The DOJ guidance notes that this recommendation “is not binding on the bankruptcy court.” Though, the court will use this information to determine whether or not to discharge all or a portion of the filer’s student loan debt.⚠️ It’s common for AUSAs to request extensions to review a filer’s paperwork. These extensions may last weeks or even months. Though the wait can be frustrating, it’s often seen as a routine part of the process, and many filers choose to agree to these requests.The judge in your case may decide to hold a hearing on your request. (Many are being held virtually.) If so, it’s a good idea to attend the hearing so you can answer any questions the judge may have and so you can then hear the judge’s decision.If you don’t agree with the judge’s decision, you can appeal the decision.

Though it is up to the court to decide whether you have an undue hardship, if you are trying to discharge your federal student loans, during the adversary proceeding the judge will ask the federal government ( the creditor for your federal student loans) whether or not it will agree that you have an undue hardship. The government is represented by the Department of Justice (DOJ) in the adversary proceeding. At the beginning of the proceeding, the DOJ will ask you to fill out an attestation of undue hardship. Present Ability to Pay: if you’re forced to repay your student loans, will you be able to maintain a minimal standard of living? Future Ability to Pay: can you show that your hardship will continue for a significant amount of the time left on repaying your loans? Good Faith Effort to Repay: have you made good faith efforts to repay your student loans before filing for bankruptcy? The judge’s decision of what to do if you have an undue hardship will also depend on which type of bankruptcy case you file (Chapter 7 or Chapter 13). In a Chapter 7 bankruptcy, you are asking a judge to cancel all of your debt, but you have to have income below a certain amount in order to qualify. In a Chapter 13 bankruptcy, you usually ask the judge to help you reorganize and lower your debt. If a judge doesn’t find that you have an undue hardship, you may be able to appeal the decision. If your bankruptcy was already approved, but you did not ask the court to make a determination of undue hardship before the case was closed, you can ask the court to reopen your bankruptcy case.

Alternatives to Bankruptcy for Managing Student Loan Debt

If you’re struggling with student loans, there are options to manage your debt without filing for bankruptcy. Federal government programs and other solutions can help make payments more affordable and provide long-term relief.

Income-driven repayment plans (IDRs): These plans lower your monthly payments based on your income and family size. After 20-25 years of qualifying payments, the remaining balance may be forgiven. Keep in mind, forgiven amounts could be taxable.
Loan forgiveness programs: Programs like Public Service Loan Forgiveness (PSLF) forgive loans for borrowers working in qualifying public service jobs after 10 years of payments. Other forgiveness options exist for teachers, healthcare workers, and military personnel.
Loan consolidation: Combining multiple federal loans into one can simplify payments and open up new repayment options. However, it may increase the total interest paid over time.
Deferment or forbearance: These options let you temporarily pause payments during financial hardship. Interest may still accrue, especially with forbearance, so they’re best used as short-term fixes.
Refinancing (private loans): Refinancing can lower your interest rate but comes with risks. For federal loans, refinancing into private loans means losing federal benefits like income-driven plans and forgiveness options.

Private vs. Federal Loans in Bankruptcy

No. In 2005, Congress enacted legislation that changed the status of private loans to the same as federal loans. Just like federal loans, the only way to discharge private student loans in bankruptcy is to prove undue hardship.

Key Considerations and Cautions

Seek Professional Advice: A qualified bankruptcy attorney can help you determine if you meet these criteria and, if you do, how to best present your circumstances to the bankruptcy courts. If you are looking for solutions to deal with significant student debt, the experienced Houston, TX bankruptcy attorney at The Fealy Law Firm, PC can go over your options to discharge this debt. Attorney Vicky Fealy helps good people through hard times, including those times when the debt you took on to improve your life via education becomes unmanageable.
Credit Counseling: BAPCPA also mandates credit counseling before a borrower can file for bankruptcy.

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