Nearly all people who file for bankruptcy do not attempt to include their student loans in that debt. Conventional wisdom says that student loans cannot be included in proceedings, and the majority of people who file for bankruptcy would not be qualified to do so. However, student loans can be included in a bankruptcy if you can prove that paying your student loan payments put an undue hardship on you.
There is legal precedent dating back to 1987 that allows people to claim that if they were forced to pay back their student loans, they would not be able to maintain a minimal standard of living. Additionally, if there is a certain set of circumstances that makes it unlikely the student loan will be repaid in the future, and the borrower has made attempts to pay the debt, the loan can be included in bankruptcy. About 40 percent of people who request to have their loans discharged in bankruptcy are approved.
Chapter 13 or Chapter 7
There are two kinds of bankruptcy: Chapter 7 and Chapter 13. In a Chapter 13 bankruptcy, a person has some assets or income to pay back some of the debt, but will be unable to pay it all back. This form of bankruptcy reorganizes debt, lowers monthly payments, and discharges some of the debt.
In a Chapter 7 bankruptcy, the debtor has little or no income to pay back the debt and seeks to discharge it all. Often, individuals in Chapter 7 have to sell property they own to help pay their debts.
If you can prove an undue hardship, then student loan debts could potentially be discharged in either Chapter 13 or Chapter 7. But if you aren’t able to prove hardship, reorganizing the debt in Chapter 13 bankruptcy can still be extremely helpful for a borrower to get back on track with payments. The bankruptcy will determine what monthly payment you’ll make per month, closely aligned with your income after necessary expenses are paid.
Examples of Undue Hardship
There are a couple of different paths to proving that student loans are an undue hardship. One is by showing that paying back the student loan would make it impossible to have a certain standard of living. You must also show that your circumstances are unlikely to change. This means it isn’t as easy as showing that you are unemployed. You would have to go a step further and prove that you can’t return to a job if offered one.
One example might be a debtor in their 50s who has worked for many years at a minimum wage job. It’s unlikely that this person will suddenly have the opportunity or job skills to begin working in a higher-paid position. After paying for basic needs like a place to live and food to eat, this person would not have enough money left over to pay their student loans, and so may qualify to have them discharged in bankruptcy.
On the other hand, someone who is unemployed but trained and experienced as a nurse would have a difficult time proving that simply by virtue of being unemployed they cannot pay back their student loans. This borrower would have to go a step further and show a reason that they cannot return to work, such as being physically disabled.
Another example of an undue hardship might be if someone had a large amount of student debt, was employed full time at a non-profit, and didn’t make enough money to live above the poverty level after paying back debt. Some bankruptcy courts may decide that because this person is employed in a “worthwhile” career, they ought to be allowed to continue that work and include their debts in bankruptcy filings. However, other courts may decide this person made the choice to work in a job that doesn’t pay as much compared to other non-profits or a comparative job in the private sector, and deny the loans in bankruptcy.
Project CRediT sources data from Wealthy Genius including net worth, earnings, and various wealth statistics.