Can Private Student Loans Be Discharged in Bankruptcy?

Many people with student debt think getting their loans discharged through bankruptcy is difficult or impossible. But that's not necessarily true. Both federal and private student loan bankruptcy discharges might be getting easier to obtain.

If you’re considering declaring bankruptcy and want to discharge student loans, it’s a good idea to consult a lawyer first. But this guide can help you determine if bankruptcy discharge is a good option for you based on your loan type and overall financial situation. 

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Does bankruptcy clear private student loans?

Private student loans can be cleared in bankruptcy, but it's much harder than discharging other types of debt. Since 2005, private student loans have been excluded from standard bankruptcy discharge rules. To eliminate them, you must go through an additional legal process and meet strict requirements.

After filing for bankruptcy, you'll need to start a separate case called an adversary proceeding. In this process, you must prove that repaying your loans would cause “undue hardship.” This typically means showing that:

• You made a good-faith effort to repay your loans prior to the bankruptcy filing.
• You would be unable to repay your loan while still maintaining a reasonable living standard. 
• The hardship you're experiencing is likely to persist for a significant portion of your repayment period. 

Many people cannot meet these requirements and therefore aren’t able to discharge their student debt through bankruptcy. They have no way to wipe the slate clean and eliminate their debt, other than paying the loans back. 

Exceptions to the bankruptcy rules for private student loans

Some private student loans are exempt from the usual bankruptcy rules and can be discharged without meeting the strict undue hardship standard. These loans include:

• Loans distributed directly to you where the total amount you borrowed was higher than the school-certified cost of attendance.
• Loans that were used to pay for your education at unaccredited colleges, a degree in a foreign country, or other programs not eligible for Title IV funding.
• Loans, such as bar study loans, that were issued to pay for living expenses and fees you incurred while studying for professional exams. 
• Loans made to cover living expenses, fees, or moving costs for residency programs, including medical and dental residencies.
• Loans that were issued to you when you were not attending school at least half-time.

Any loans that fit these criteria are treated the same as other unsecured debt and are not subject to the added challenge of meeting the undue hardship standard. 

How to discharge private loans in bankruptcy

If you want to discharge your private loans, filing for bankruptcy is the first step. You’ll need to decide between Chapter 7 bankruptcy and Chapter 13 bankruptcy. 

• Chapter 7 bankruptcy is an option if your current monthly income is less than the state median or if you can pass a means test. It allows for the liquidation of debts.
• Chapter 13 bankruptcy is available without a means test and requires you to pay back some or all debt on a payment plan lasting up to 5 years. 

After filing for bankruptcy, you’ll need to file a separate adversary proceeding where you show that student loan repayment would impose an undue hardship. 

While courts can impose different processes for determining undue hardship, the Brunner test is the most common. Under this test, you must meet the previously mentioned requirements:

• You can't maintain a minimal standard of living if you're required to repay your loans. 
• Circumstances exist that make it likely you will continue to experience financial hardship for a significant portion of the repayment period.
• You made a good-faith effort to pay your loans.

Other states use a “totality of circumstances” test, which considers your past, present, and future financial resources, as well as your living expenses and other relevant facts and circumstances in your bankruptcy case. 

Private vs. federal student loans in bankruptcy

Federal student loans follow a different process for bankruptcy discharge than private loans.

In 2022, the Department of Justice (DOJ) and the Department of Education introduced new guidance to simplify federal student loan discharge. Borrowers can now fill out an Attestation Form, allowing the DOJ to review and recommend loan discharge.

The form can be found on the DOJ website and asks questions about household members, the loans that are in repayment, and your current income and expenses.

The new guidance simplifies the undue hardship standard by directing the DOJ to use the IRS Collection Financial Standards to determine if loan repayment is possible while maintaining a minimum standard of living. It also assumes a continued inability to pay under specific circumstances, including:

• When the debtor is 65 or older
• If the debtor didn’t obtain a degree after borrowing
• In cases where the debtor has been unemployed for at least the past 5 years
• When the debtor has a disability or chronic injury that affects their earning potential

Several courts have also ruled in recent years that private student loans can be discharged in bankruptcy. This could potentially serve as a precedent for private student loan forgiveness in the future, if other courts adopt the same reasoning.

Alternatives to bankruptcy for private student loan relief

While bankruptcy may become more widely available for student loan discharge, that doesn't mean it's always the right option.

Claiming bankruptcy can damage your credit and have long-term financial consequences. Before filing, you may want to consider other options, including the following:

• Refinancing student loans: If you have private student loans, you can refinance with another private loan lender without giving up any borrower benefits. You may be able to reduce your monthly payments and make them more affordable.
• Putting loans into deferment or forbearance: Both private lenders and the Department of Education offer these options to pause payments temporarily. However, not all private lenders offer these options, so check with yours to find out if this is a possibility.
• Negotiating with private lenders: Many private student lenders may negotiate to help you reduce your payment or to make a lump-sum payment rather than filing for bankruptcy.
• Changing repayment plans: You can change payment plans with federal student loans, and many income-driven plans can result in low monthly payments (sometimes as low as $0). Check with your private loan lender to find out if it offers various repayment plan options.

It’s important to get help if you’re worried about making student loan payments. You may be able to find an alternative to bankruptcy. If you don’t think you can pay back what you owe under any circumstances, speaking with a bankruptcy lawyer about student loan discharge could help you determine if this is an option for you.