Can I file for bankruptcy on student loans?

Published by:
Abigail Moses

Reviewed by:
Alistair Vigier
Last Modified: 2024-05-11
Yes, it is possible to get rid of student loans in bankruptcy. The standard procedure that courts apply for determining whether student loans are eligible to be discharged is extremely strict; meeting the criteria depends on the particular bankruptcy court’s ruling. However, that doesn’t mean that you shouldn’t attempt it.
To have both student loans, private or federal, dissolved during bankruptcy proceedings, you need to prove that the repayment creates some “undue hardship” on you and your dependents.
It’s a more demanding standard to meet. You must prove that you can get rid of debts from credit cards, overdue utility bills, or personal loans. In many instances, however, it’s worth trying to demonstrate that you comply with this requirement if you can make an argument to support it.
There are options to file for bankruptcy if your loan payments are not affordable. As bankruptcy can have profound implications for your financial and credit score, consider these options first. Here are the steps to eliminate or decrease your student loans.
What You Need to Know About Bankruptcy
Bankruptcy is presented in two types…
Chapter 7 – the most commonly used – and Chapter 13. In both, if you are successful in filing, you’ll be able to avoid having to pay certain debts, while garnishments of wages and other debt collection practices will be stopped.
Chapter 13 bankruptcy provides filers who earn a steady income a payment plan that allows them to settle debts in 3 to 5 years. The residual debt is then released following the period. In Chapter 7 bankruptcy, there’s no repayment plan, and discharge may occur earlier; however, your eligible assets are transferred to pay off your obligations. You are following that the remaining debts are discharged.
In both situations, there’s a disadvantage that bankruptcy could show up as a credit score for 10 years when you choose to file for Chapter 7 and seven years in the case of Chapter 13.
If you don’t agree to file for Chapter 13, you might also lose the collateral you’ve put up to cover secured debts, such as a mortgage, which isn’t paid and has a legal claim against it.
How to get Student Loans Refunded in bankruptcy
The student loan has to pass a second test before it can be eliminated in bankruptcy. A majority of courts employ tests like the Brunner test.
It was created in honour of the 1987 court case to determine if your loan constitutes the risk of “undue hardship” to you and your dependents. You can establish the existence of undue hardship by showing that:
- The cost of repaying student loans stops you from sustaining the “minimal” standard of living for your family members and you depending on your income and expenses.
- This will likely remain the same during the remainder of the loan’s time frame for repayment.
- Up to now, you’ve been doing your best to repay the loan.
Bankruptcy on student loans
If you want to file for bankruptcy, you must first take the obligatory credit counselling program and provide details of your financial and debt-related circumstances to the U.S. Bankruptcy Court.
To file for the Chapter 7 proceeding, you’ll be required to prove that you are in a position to pay your dues based on your resources. A bankruptcy trustee is designated to manage the liquidation process according to Chapter 7 and the repayment plan in Chapter 13.
Another step in your bankruptcy process is to request that your student aid loans be eliminated. This is known as an adversary proceeding.
Filing your application
It asks that the court determine that you have met the test of undue hardship in light of the financial situation you provided when filing your application.
Suppose you’re unable to satisfy the standard of undue hardship. In this scenario, you could choose to apply for Chapter 13 bankruptcy and acquire an additional monthly installment for your student loans that are based on the payment plan that is mandated by the court.
It could mean a more manageable payment or the chance to pay down your debts faster and decrease other debt repayments. When the three-five-year period is over, you can try to clear the remaining balance in the event of adversity.
Benefits of Filing Bankruptcy For Student Loans
The burden of student loan debt has become a pervasive issue in modern society. According to the Federal Reserve, there is over $1.7 trillion in student loan debt outstanding in the United States.
More and more young people are struggling to make ends meet due to the high monthly payments required to repay these loans.
As a result, an increasing number of people are exploring the option of filing for bankruptcy on their student loans.
While the concept of filing for bankruptcy on student loans may seem daunting, the truth is that it can offer a multitude of benefits for those who are struggling with this type of debt.
Debt Relief
The primary benefit of filing for bankruptcy is it relieves a great amount of stress and pressure by easing the amount of debt that needs to be paid immediately.
For people who are already struggling with multiple debts, being able to file for bankruptcy on student loans takes away a major source of monetary issues for people.
Another benefit of filing for bankruptcy on student loans is that it protects from creditor actions. Once you have filed for bankruptcy, creditors are no longer able to take any legal action against you to collect your debt.
This means that wage garnishment, bank account levies, and other collection actions will no longer be a concern for you.
Keep Some Assets
One of the biggest misconceptions about bankruptcy is that it requires you to give up all of your assets.
This is simply not true. In many cases, you will be able to keep your assets, such as your home, car, and personal possessions, provided they fall within certain exemptions. Do note, however, that you’ll need to talk with a lawyer to be sure which of your assets you’re eligible to keep.
Filing for bankruptcy on loans puts a stop to all interest on your loans. This is important because interest can quickly add up and make your debt even more difficult to repay.
By filing for bankruptcy, you can prevent this from happening and potentially save thousands of dollars in interest charges over the life of your loans.
Alternatives to Bankruptcy for Student Loans
Since bankruptcy is costly and time-consuming, most experts view it as a last resort option for the borrowers if they’ve exhausted all alternatives, such as negotiations with creditors to negotiate a more manageable payment or a lower interest rate.
If you’re trying to stabilize the student loan payment along with other costly, non-repayable obligations like medical bills or credit cards, bankruptcy might be able to offer relief. However, if student loan debt is your sole concern, you should consider these options.
Federal Loan Rehabilitation
If the federal loans you are owed have entered default – meaning that you are at least 270 days overdue for most student loans – you could choose to take an organized way to avoid bankruptcy.
Rehabilitation requires paying on time for 9 months with a minimum of 15% of the earnings. Once you have completed the process, the default notice will be removed from your credit record. It is possible to apply to the IDR program to help make your remaining debts easier to administer.
Federal Loan Consolidation
Another option post-default to repay federal student loans would be consolidation. The process involves fusing all federal loans into one and paying on-time monthly payments or agreeing to pay off the consolidation loan under one of the IDR plans.
After that, your loans won’t remain in default. However, unlike rehabilitation, the note will stay at the top of your credit history.
If you can, speak with an accountant or an attorney with expertise in student loans when you’re in contact with a collection agency regarding the possibility of settling.

Do student loans go away with bankruptcy in Canada?
Student loans are considered a priority debt and are generally not dischargeable in bankruptcy. The minimum repayment period for student loans to be discharged in bankruptcy is seven years, during which the borrower must make payments and demonstrate financial hardship.
If the seven-year period has passed and the borrower still cannot repay the loan, they may be eligible for a discharge.
However, the discharge process is difficult and requires the borrower to demonstrate that repaying the loan would cause undue hardship.
While it is possible to have student loans discharged in bankruptcy in Canada, it is a complex process that requires meeting specific conditions and a waiting period of at least seven years.
Financial Security After Filing For Bankruptcy
Bankruptcy allows you to get back on your feet and start getting ahead financially without the major worries of student loan debt. Of course, there’s still life after filing for bankruptcy, and some people may feel lost after this.
They may start wondering if they’ll even be able to apply for loans again. Here are some important tips for achieving financial stability after bankruptcy.
Creating and consistently sticking to a strict budget is one of the best ways to achieve financial stability. When you are on a tight budget, you are forced to be mindful of your spending habits and make sure that you are only spending money on necessities.
Prioritize your spending on the essentials and allocate savings to an emergency fund.
Prioritize Emergency Fund
One of the best ways to prepare for unexpected expenses is to build an emergency fund. When you are on a strict budget, you can allocate a portion of your income to your emergency fund each month, which can help you be better prepared for any financial emergencies that may arise.
If possible, make sure to have this account in a bank with solid interest rates so it’s not just sitting around accruing no interest.

Pay Off Any Remaining Debts
While bankruptcy may provide temporary relief from debt, it does not eliminate all debt obligations. Make sure that you work towards being debt-free as soon as possible.
This will not only improve your likely suffering credit score but also help you avoid having to file for bankruptcy again in the future. It’s the best way to regain control of your finances after going through a difficult time.
Paying your bills on time offers much of the same benefits as paying off the remaining debt. However, the difference lies in the fact that bills are going to be something you’ll always have to pay.
Paying bills early or on time forces you to make a habit of doing things the right way, which helps your financial smarts improve. It’s also a great way to avoid interest and late penalty fees.
Bankruptcy on Student Loans Conclusion
Filing for bankruptcy on student loans offers a multitude of benefits for graduates who are struggling in today’s ever-shifting economy.
From debt relief to protection from creditor actions and improved credit, there are many reasons why individuals may choose to file for bankruptcy on their student loans. If you are struggling with student loan debt, it may be worth considering.
It’s also important to build a strong case before even considering this option. Filing for bankruptcy is an incredibly strict process with plenty of complex legal details that most people will likely need a lawyer for.
While it’s possible to represent yourself, it’s crucial to note that doing so puts all responsibility for the case solely on your shoulders.
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