Can You Discharge Student Loans in a Chapter 7 Bankruptcy?

Bankruptcy is typically a last resort, but for those drowning in student loan debt with no escape, it can be a means of relief. Although eliminating federal or private student loans in bankruptcy can be challenging, it is not entirely impossible. While it may be challenging, recent changes from the Department of Justice (DOJ) have made the process slightly easier, offering hope to those who meet the stringent requirements.

If you’re considering going with this route, you’ll need to show that repaying your loans would cause you “undue hardship.” This means proving that you cannot maintain a basic standard of living for yourself and your family while paying back those loans.

If you’re considering bankruptcy, it’s essential to understand your options. Once you file, collections against you are automatically paused, and with the right evidence, you may be able to wipe your student loan debt clean. Here’s what you need to know about tackling student loans through a Chapter 7 bankruptcy and how it can be the fresh start you need.

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is a common option for individuals seeking to eliminate unsecured debts, such as credit card bills and medical expenses, and, in some cases, student loans. This process involves selling non-essential assets to pay your creditors, but many people can keep important things like their home or car, depending on state laws.

The first step is to take a means test to see if you qualify. If you do, you’ll file paperwork and attend a meeting with your creditors. You can typically expect your debtors to be discharged within a few months. Even though this filing will stay on your credit report for up to 10 years, lawyers describe Chapter 7 as a chance for a “fresh start” because it’s a straightforward way to relieve the burden of debt.

It’s essential to remember that everyone’s situation is unique. Consult a bankruptcy lawyer to understand possible risks, like losing assets, and make sure you’re eligible for this type of bankruptcy.

Filing Bankruptcy on Your Student Loans

Discharging student loans through bankruptcy can be challenging, but it is possible if you approach the process correctly. Working with an experienced bankruptcy attorney is highly recommended, as the process can be complex, and having a professional to guide you can make a significant difference.

When using bankruptcy as a way to tackle student loan debt, it’s important to know that you’ll need to show that paying back those loans would cause you “undue hardship.” Here’s how to get started:

Choose Your Bankruptcy Chapter

Chapter 7 —This could wipe out qualifying debts completely, if you’re approved.
Chapter 13 —This creates a repayment plan over 3 to 5 years, and you still have a chance to have the debt discharged later on.

Gather Your Documents

You’ll need to file a student loan attestation form, which outlines your loans and any financial struggles you may be experiencing.
Next, you’ll file an adversary proceeding, which is a separate lawsuit within your bankruptcy case, that is aimed at challenging the debt.

What To Expect During the Adversary Proceeding

Discovery Phase (Once the lender has been notified)

Both sides share evidence, which can include:
- Requests for documents (like loan records and pay stubs)
- Interrogatories are written questions answered under oath
- Requests for admissions to confirm or deny specific facts
- Possibly depositions, which are recorded testimonies given under oath

Trial Phase

You present evidence such as medical records, your job history, and even expert testimony to support your claim of undue hardship.
The lender defends against your claim.
Ultimately, the judge reviews all the evidence, including insights from the Department of Justice, before making a decision.

Different courts see hardship in various ways. Most of them use the Brunner Test, which was created in 1987, which requires you to show three things:

Repaying the loans would make it hard for you to maintain a basic standard of living.
Your financial struggles are likely to continue for most of the time you’ll be paying off the loans.
You’ve made a real effort to repay the loans before you decided to file.

Some courts will consider the overall situation and take into account factors such as your potential income and living expenses. As a result, the results may vary depending on your location.

There have been recent policy shifts aimed at streamlining the process. The Consumer Bankruptcy Reform Act of 2020 suggested creating a more straightforward process under something called “Chapter 10.” The Department of Education has been requesting public input on how to make hardship standards more fair.

For the time being, being successful in this process requires meticulous documentation and strong legal support. If you’re thinking about this option, you’ll want to hire a bankruptcy attorney who can help you understand your options and see if your situation meets the requirements for relief.

Understanding How to Discharge Student Loans Through Chapter 7 Bankruptcy

Discharging student loans through Chapter 7 bankruptcy can be challenging, but in certain situations, individuals may qualify for what is known as “undue hardship.” Here are some key points to consider if you’re thinking about this route:

Permanent Disability —If you have a long–term disability that makes it hard for you to earn a living, and repaying your loans would compromise your basic needs, the courts are more likely to grant a discharge.
Low Income with High Expenses —If you’re earning too little to cover your student loan payments along with your essential living expenses, especially if you don’t have other skills to boost your income, this could strengthen your case.
Age and Retirement Status —Older borrowers, especially retirees who rely on fixed incomes, often succeed in discharging student loans, as long as their assets (like retirement savings) are protected in bankruptcy.
Chronic Unemployment or Outdated Skills —Job loss on its own may not be enough. Still, if you can prove that your skills are no longer in demand, such as if your industry has undergone significant changes or technology has taken over, this can help demonstrate that repaying your loans is unrealistic.

Thanks to the new oversight by the DOJ, it has become cheaper for some borrowers, and the process has improved. However, the main challenge remains. Typically, borrowers with very limited income and poor job prospects qualify. Many who meet these criteria still struggle to afford legal help, making federal relief options (like disability discharges) more appealing for some.

Turn to The Gorski Firm for Reliable Bankruptcy Advice

If your request to discharge your student loans in bankruptcy has been denied, do not lose hope. There are still ways to tackle your debt.

Some creditors may offer an income-driven repayment plan, which can lower your monthly payments based on your income and family size. If you work in public service or education, there are forgiveness programs for those who work in public service or education, and you may be able to refinance, lowering your interest rate and reducing your monthly payments, or negotiate with lenders for more manageable terms. If you’re considering refinancing, be cautious, as this means relinquishing important protections associated with federal loans.

At The Gorski Firm, we specialize in representing both debtors and creditors in bankruptcy cases, ranging from the simplest to the most complex. With our extensive experience, we offer valuable insights into the challenges that each party may encounter during the process.