Student Loans Bankruptcy – Discharging to Overcome 523

student loans bankruptcy

Student Loans Bankruptcy

The Twists and Turns of Bankruptcy for Student Loans

2021 update: the Fresh Start Through Bankruptcy Act was introduced in the Senate, which could be a real game-changer for student loans and bankruptcy reform and student loan forgiveness.

Student loans bankruptcy cases are in once sense common. Many people have student loans, and if they’re filing bankruptcy Chapter 7 or bankruptcy Chapter 13, they must be listed. So the school loans have to be in the bankruptcy. But what happens next?

General Rule of Student Loans and Bankruptcy

Most unsecured debt is discharged in a bankruptcy. But a look at 11 USC 523(a)(8) gives us the exception. Student loans, generally, are not dischargeable under any chapter of the Bankruptcy Code.


There is an extremely narrow exception to student loans. The borrower would have to show “undue hardship.” This determination is for a judge to rule, but is usually made by a combination of factors.

Undue Hardship

“But I can’t afford them,” says almost everyone who visits our office. That’s not to say that they’re lying. It’s probably true, there’s no money to pay them. If I’m filing bankruptcy, doesn’t that prove they’re an undue hardship and I should get relief in a student loans bankruptcy?

Not really, and here’s why: everyone filing bankruptcy has a hardship paying their debts or else they wouldn’t be filing bankruptcy.

It’s up the person filing asking  to prove that it’s an undue hardship. It’s got to be a special hardship, above and beyond the normal hardship that everyone filing for bankruptcy Chapter 7 or Chapter 13 is going through. And that’s where the bar gets raised pretty high.


Factors for “Undue Hardship”

Those who file bankruptcies in California are subject to the laws as they are interpreted in the Ninth Circuit, where California is. The Ninth Circuit follows the test for undue hardship set forth in the cases of In re Brunner, In re Shankwiler and In re Pena.

These cases state that in order to demonstrate hardship for purposes of discharging a student loan, three criteria must be met:

  1. the debtor must prove that they cannot maintain a minimal standard of living if forced to repay the student loans, based upon current income and expenses;
  2. that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and
  3. that the debtor made a good faith effort to repay the loans.

The court is required to exercise its discretion in determining whether and undue hardship does in fact exist.

First the courts will look to the net monthly income and subtract out reasonable monthly expenses.

Then it will look to see whether the debtor profited in the work force by his education. They’ll also consider whether the debtor’s earning potential was increased by the education.

Lastly, courts look to see what efforts the debtor made to repay the loans. There’s a look if the debtor requested a deferment or not.

The inquiry is guided by the idea that the debtor’s bad financial condition and default should not have been caused by the debtor’s own willfulness or negligence, but rather by factors beyond the debtor’s control.

Each case will of course depend on its own facts. It’s entirely up to the debtor’s lawyer to convince the court that “undue hardship” does in fact exist in the debtor’s case. Let’s just say it’s an uphill battle, and the presumption is that they stay.


Chapter 13 Bankruptcy for Student Loans

However, a bankruptcy case can, however, eliminate other debts that are competing for your dollars and provide a measure of peace during a Chapter 13 plan. Further, in a Chapter 13 bankruptcy, some courts permit the debtor to separately classify a student loan.

This can mean that a greater percentage of disposable income goes to the student loan than non-secured debt. It’s something we’ve routinely arranged. I set it up so you pay the student loans directly. The credit cards can get more money and more of their debt paid.

But if you do a Chapter 13 bankruptcy, it can get you a five-year deferment of having to pay them directly. This gets them off your back. Also it gives you some breathing room. This way, you can afford to pay them directly when the Chapter 13 is over.

And better yet: the student loans will get paid through the Chapter 13 bankruptcy case. You should end up having less debt than you started with.


Bottom line about Student Loans Bankruptcy Cases

If you do a bankruptcy, chances are your student loans probably aren’t going away.  Let’s just say you don’t want to be so bad off that you can get rid of your student debt. Usually, under current law, if you qualify, you have far greater problems.

Now, I’ve helped discharge student loans and bankruptcy Chapter 7 more than once. I’ve done it.  It’s possible you may benefit from a student loans bankruptcy, but that’s not the expectation.

When you contact us, that’s going to be the first thing we say: it’s probably not going anywhere.  You can do a bankruptcy and get rid of the other debt. At the very least, you’ll better be able to afford the student loans after.

Hale Andrew Antico was chosen by his bankruptcy attorney peers to be President of SoCal's largest consumer debtors lawyers' association two times, and has been voted best Santa Clarita bankruptcy attorney by our SCV neighbors four times. Arrange a no-obligation consultation by Zoom or in-person to learn your options for a fresh start.

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