Bankruptcy and Student Loans

Student loans are notoriously difficult to discharge in bankruptcy — but not impossible. Here's what you need to know about the "undue hardship" standard, recent changes, and when bankruptcy might make sense.

The Basics: Why Student Loans Are Different

Most unsecured debts — credit cards, medical bills, personal loans — are automatically discharged in bankruptcy. Student loans are a major exception. Under Section 523(a)(8) of the U.S. Bankruptcy Code, federal and most private student loans are exempt from discharge unless repayment would impose an "undue hardship" on you and your dependents.

This exception was added to the Bankruptcy Code in 1978 (for federal loans) and expanded to private loans in 2005. Congress was concerned that students would simply take out loans, graduate, then immediately file for bankruptcy before building a career. The undue hardship standard was meant to prevent abuse.

In practice, courts have applied the undue hardship standard very strictly — making it extremely difficult for most borrowers to succeed, even those in genuine financial distress.

The 2022 DOJ / DOE Guidance: A Meaningful Change

What changed in November 2022?

The U.S. Department of Justice (DOJ) and Department of Education (DOE) jointly issued new guidance directing federal attorneys to take a more flexible, fact-based approach when evaluating undue hardship claims — and to recommend discharge more readily when the facts support it.

Under the new guidance, when a borrower files an adversary proceeding, the DOE systematically reviews the borrower's financial circumstances using a standardized checklist. If the checklist indicates the borrower is unlikely to repay — based on income, expenses, age, health, and years in repayment — the DOJ will recommend discharge or partial discharge rather than fighting it.

This does not change the underlying law (Congress would need to act for that), but it means the government is less likely to aggressively oppose discharge for borrowers who genuinely cannot repay. Early data suggests meaningful improvements in discharge rates for qualifying borrowers.

The Undue Hardship Standard

To discharge student loans in bankruptcy, you must file a separate lawsuit within your bankruptcy case called an adversary proceeding. In that proceeding, you must prove "undue hardship." The legal test varies by federal circuit:

The Brunner Test

Used in most circuits (1st, 2nd, 3rd, 4th, 5th, 6th, 7th, 9th, 10th, 11th)

You must prove all three:

1You cannot maintain a minimal standard of living for yourself and dependents while repaying the debt
2Your current financial state is likely to persist for most of the remaining repayment period
3You have made good-faith efforts to repay the loans

Totality of Circumstances

Used in the 8th Circuit

A more flexible test weighing all relevant factors:

Current income and reasonable living expenses
Borrower's health and age
Number of dependents
Past, present, and future financial resources
History of good-faith repayment efforts
Prospects for future income growth

Chapter 7 vs. Chapter 13: What's the Difference?

Chapter 7 — Liquidation

Most unsecured debts discharged in 3–6 months
Non-exempt assets may be sold to pay creditors
Student loans NOT automatically discharged
Must file separate adversary proceeding for student loans
Automatic stay stops all collections immediately
Stays on credit report for 10 years

Chapter 13 — Reorganization

3–5 year structured repayment plan
Keep assets while repaying creditors
Student loans NOT automatically discharged
Can include student loans in payment plan at reduced rate
Must file adversary proceeding for full discharge
Stays on credit report for 7 years

Consider These Alternatives First

Before pursuing bankruptcy, exhaust these federal relief options, which are free and do not damage your credit:

Income-Driven Repayment (IDR)

Can reduce payments to $0/month for very low-income borrowers. Remaining balance forgiven after 20–25 years.

PSLF

If you work for a government or nonprofit, all remaining balance forgiven after 120 qualifying payments (10 years).

Total and Permanent Disability Discharge

If you have a qualifying disability, your entire loan balance can be discharged tax-free.

Forbearance or Deferment

Pause payments for up to 12 months at a time during hardship (though interest may accrue).

Teacher Loan Forgiveness

Up to $17,500 forgiven for qualified teachers in low-income schools after 5 consecutive years.

Closed School Discharge

If your school closed while you were enrolled or within 180 days after withdrawal, you may qualify for full discharge.

This Is Not Legal Advice

Bankruptcy law is complex and highly fact-specific. Whether you can discharge your student loans depends on your specific income, expenses, health, loan type, and the federal circuit where you file. This page provides general educational information only. If you are considering bankruptcy, consult a licensed bankruptcy attorney — many offer free consultations. Student loan bankruptcy specialists exist and can give you a realistic assessment of your chances.

Frequently Asked Questions

Explore Other Relief Options

Bankruptcy is rarely the best first step. Here are some free federal alternatives to explore.