Student Loans and Chapter 7: The Facts

Student loan debt has become one of the most pressing financial burdens for Americans. For those struggling to stay afloat, bankruptcy may seem like a logical solution. But the rules for student loans and Chapter 7 bankruptcy are not as straightforward as they are for credit cards or medical bills.

If you are buried in student debt and wondering whether filing for Chapter 7 can provide relief, this guide will help clarify your options, the legal hurdles, and what recent changes might mean for your case.

Can Student Loans Be Discharged in Chapter 7 Bankruptcy?

The short answer is yes, but only in rare cases. Unlike most other debts, student loans are not automatically discharged in a Chapter 7 case. To eliminate student loan debt, a separate legal process called an adversary proceeding must be filed within the bankruptcy case. You must prove that repaying the loans would impose an undue hardship on you and your dependents.

Understanding “Undue Hardship” and the Brunner Test

The phrase “undue hardship” is the legal benchmark used by bankruptcy courts to determine whether a borrower qualifies for student loan discharge. Most courts apply what is known as the Brunner Test, a three-part standard that evaluates:

1. Poverty: Whether you can maintain a minimal standard of living if forced to repay the loans.
2. Persistence: Whether this financial hardship is likely to continue for a significant portion of the repayment period.
3. Good Faith: Whether you have made a sincere effort to repay the loans before filing bankruptcy.

Proving all three parts of the Brunner Test can be challenging, and outcomes can vary by jurisdiction. However, the growing recognition of undue hardship in courts, along with increasing national student debt, brings renewed optimism for borrowers seeking relief.

Recent Developments in Bankruptcy and Student Loans

In recent years, federal courts and lawmakers have shown increased flexibility in how they interpret the undue hardship standard. While student loans are still difficult to discharge in Chapter 7, more judges are beginning to approve partial or full discharges in cases involving long-term unemployment, disability, or extreme financial hardship.

In 2022, the Department of Justice and the Department of Education issued new guidance to streamline the evaluation process and create a more consistent standard for discharging federal student loans in bankruptcy. While this does not guarantee success, it signals a shift toward greater fairness and transparency in these cases.

What Happens to Student Loans in a Standard Chapter 7 Filing?

In most cases, your student loans will survive the Chapter 7 bankruptcy. This means:

• You will still owe the full loan balance after your case is discharged.
• Interest may continue to accrue during and after bankruptcy.
• Once the automatic stay is lifted, the loan servicer can resume collection efforts, including wage garnishment and tax refund offsets.

However, filing Chapter 7 may still be beneficial. By discharging other debts, such as credit card balances, personal loans, and medical bills, you can free up income to manage your student loan payments more effectively.

Federal vs. Private Student Loans in Bankruptcy

There are two primary types of student loans: federal and private. Both are subject to the undue hardship standard, but the process of proving your case and negotiating a resolution may differ.

• Federal Loans may offer more options post-bankruptcy, including income-driven repayment plans and temporary deferment.
• Private Loans typically have fewer repayment options, and some may not qualify for the full range of federal protections. In certain cases, some courts have ruled that private loans not used for qualified education expenses may be dischargeable without the undue hardship test.

It is critical to consult with an experienced attorney who can analyze the nature of your loans and determine the best course of action.

What Is a Chapter 7 Bankruptcy with Student Loans and No Assets?

If you are filing a Chapter 7 bankruptcy with no assets, you may still be able to discharge other debts, even if your student loans remain. A no-asset bankruptcy means the trustee does not liquidate any property to repay creditors, and your case may proceed more quickly.

While your student loan debt will likely still exist unless you succeed in proving undue hardship, eliminating other financial burdens can still give you valuable breathing room and a more manageable financial future.

Should You Try to Discharge Student Loans Through Bankruptcy?

With recent legal developments, the process is difficult, but it is not impossible. You may be a good candidate for student loan discharge if:

• You have a permanent disability or medical condition that prevents you from working.
• Your income is far below the poverty line, with little chance of improvement.
• You have been in repayment for several years and have made honest efforts to pay.
• You are approaching retirement with no means to repay.

Even if a full discharge is not granted, the court may approve a partial discharge or restructure the loan terms based on your current and future circumstances.

Attempting to discharge student loans in bankruptcy without legal help is risky. The adversary proceeding is complex, and success depends on proper documentation, strong legal arguments, and an in-depth understanding of bankruptcy law.

At the Law Office of Jeffrey A. Klein, we understand the emotional weight of student debt and the legal barriers that come with it. We work closely with our clients to evaluate their eligibility, prepare the necessary filings, and advocate for fair treatment in bankruptcy court.

Why Legal Guidance Is Crucial

Filing Chapter 7 bankruptcy will not automatically erase your student loans, but that does not mean you are out of options. Student loan relief may be within reach with the right legal strategy and a compelling case.

Whether you are facing relentless collection calls, struggling to pay rent, or feeling hopeless about your financial future, we are here to help you explore every possible avenue for debt relief.

Contact the Law Office of Jeffrey A. Klein online or call 386-252-3061 for a free consultation. Let us find out if bankruptcy is the right solution for your unique situation, and if your student loans can finally be put behind you.