Can I Discharge Private Student Loans in Bankruptcy?

Higher education is expensive. The total U.S. student loan debt is nearly $1.78 billion, according to the Federal Reserve. That number includes private student loans and federal student loans, and private loans account for less than 10% of this debt. 

Federal student loan borrowers typically have more repayment and student loan forgiveness options than private student loan borrowers. For example, federal student loan borrowers can take advantage of income-based repayment plans, forbearance, or deferment to lower their monthly payments or pause loan payments temporarily. 

Private student loan borrowers rarely have such options. This leads some people to wonder if bankruptcy is the solution to deal with overwhelming private student loan debt.

Though it’s rare, private student loan debt can sometimes be discharged as part of a Chapter 7 or Chapter 13 bankruptcy case. That said, you must take the additional step of filing an adversary proceeding after you file your bankruptcy case. Then you have to prove that paying off the debt would cause undue hardship — which has a specific definition in bankruptcy law and is determined using something called the Brunner Test. 

What Is a Private Student Loan?

Private student loans are issued by private lenders like banks or other financial institutions. Sometimes these loans are considered private student loans and other times they are considered personal loans.

To be considered a qualified education loan — instead of a personal loan — the loan must be used solely for “qualified higher education expenses.” 

Higher education expenses are defined as the cost(s) of attendance at any eligible educational institution. 

• Cost of attendance includes tuition, fees, room and board, books, necessary equipment and materials, supplies, and transportation. 

• Eligible education institutions are most accredited public and private post-secondary institutions, including those that are for-profit. 

Private student loans aren’t issued or backed by the U.S. Department of Education like federal loans are. Defaulting on a private student loan comes with different consequences, and may happen more quickly, than defaulting on federal student loans when you can’t make your payment.

Can Student Loans Be Discharged in Bankruptcy?

Student loan debt is typically classified as unsecured debt, just like credit card or medical debt. While credit card and medical debt can be discharged in a Chapter 7 bankruptcy, private and federal student loan debt are treated differently. This is outlined in the federal bankruptcy law known as the Bankruptcy Code.

To discharge a student loan in bankruptcy you must first file your bankruptcy case, then file an adversary proceeding (AP) with the Bankruptcy Court. These proceedings are very different from normal bankruptcy proceedings. They look more like a civil lawsuit.

Most bankruptcy cases aren’t heard before a judge, but an adversarial proceeding may require a full trial before a bankruptcy judge. This is why many people who try to discharge their student loans hire bankruptcy attorneys to help with their cases. Even if you file an AP, you’ll need to pass the Brunner Test to secure a bankruptcy discharge for a student loan (in most jurisdictions).

What Is the Brunner Test and How Do You Pass It?

In most federal courts in America, you need to pass the Brunner Test to discharge a student loan. The Brunner Test was originally created by the court in a case called: Brunner v. New York State Higher Education Services Corp. The Brunner Test is what determines whether or not repaying your loans is causing undue hardship. In other words, it sets the terms for the undue hardship standard. If you can’t meet this standard, you won’t have your loans discharged.

All states and territories in the U.S. use the Brunner Test in their bankruptcy courts, except Maine, Massachusetts, New Hampshire, Rhode Island, Puerto Rico, Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Missouri, and Arkansas.

There are three parts to the Brunner test to help the court determine if an undue hardship exists. 

Part 1: Minimal Standard of Living

To pass the first part of the Brunner Test you must prove you have extenuating circumstances that create a hardship. In other words, you can't pay the student loan while still maintaining a minimum standard of living. Each court can decide for itself how to define a minimal standard of living.

Part 2: Hardship Persists for a Substantial Portion of the Repayment Period

If you pass the first part of the test, you then have to prove that your hardship will continue for most of the loan’s repayment term. As you might imagine, it can be difficult to predict how long a bad financial situation will persist. To complicate matters, courts interpret hardship differently. This may be easier to prove if you are over age 65 or you have a permanent disability. 

Your local Bankruptcy Court will have its own interpretation of what it considers a “substantial portion” of the repayment period. 

Part 3: Good Faith Effort To Repay the Student Loan

The final hurdle in the Brunner Test is showing that you’ve made a “good faith effort” to repay your educational loans. Like the second part of the test, bankruptcy courts interpret this differently and some are more strict than others. 

As a general rule, most courts want to see that you’ve at least made an effort to find employment, maximize your income, and minimize your expenses. They also want to see that you’ve made an effort to make at least one student loan payment or made an attempt to negotiate a repayment plan with the lender.

Private Student Loan Repayment—What if You Can’t Pay?

Federal student loan borrowers often have access to income-based repayment plans, loan forgiveness or cancellation for work in certain nonprofit jobs, or forbearance or deferment. As a private student loan borrower, you’re unlikely to have access to these kinds of debt relief, but there are other options. 

You can try to refinance your loans to lower your interest rate and/or monthly payment or try to negotiate a debt settlement to pay less than the full amount you owe. However, to be successful with a debt settlement, you may need to be able to offer a large lump-sum payment. 

If you’re also struggling with credit card debt or other debt in addition to your student loans, you may want to talk to a credit counselor to help get your finances in order.

Remember, if you miss student loan payments or default on your loans, it will reflect negatively on your credit report and hurt your credit score. 

What if You Have Federal and Private Student Loans?

Many people have a mix of federal and private student loans. If this is the case for you and you’re planning to file bankruptcy, you may have an easier time getting your federal student loans discharged than your private loans thanks to Department of Justice policy changes from late 2022. You still need to meet undue hardship requirements, but they are more clearly laid out for federal loans thanks to the 2022 policy change.

Upsolve has helped people discharge over $2 million in federal student loan debt and over $700 million in other debt through our free Chapter 7 filing tool. We can also connect you with a bankruptcy attorney for a free consultation if you want some personalized guidance on your case.