What Happens to Student Loan Debt in Bankruptcy After Default?

Estimated reading time: 6 minutes

Defaulting on student loans can create serious financial pressure. Depending on the type of loan, borrowers may face collection activity, damaged credit, wage garnishment, or offsets of certain federal payments.

If student loans are part of a larger debt problem, you may wonder whether bankruptcy can help. Student loans are treated differently from many other debts in bankruptcy, but that does not mean they can never be discharged.

Quick Answer

Defaulting on a student loan does not automatically make it dischargeable in bankruptcy. Certain student loans generally survive Chapter 7 or Chapter 13 unless the borrower establishes that repayment would impose an undue hardship. Bankruptcy may still provide meaningful relief from other qualifying debts even when student loans remain.

What Happens When a Student Loan Goes Into Default?

A student loan becomes delinquent when required payments are missed. For many federal student loans, default generally occurs after at least 270 days without a required payment.

Default can lead to consequences such as:

• Damage to your credit
• Collection activity
• Administrative wage garnishment
• Treasury offset of tax refunds or certain federal payments
• Loss of access to some federal student aid benefits

The exact consequences depend on the type and status of the loan.

Does Bankruptcy Automatically Discharge Defaulted Student Loans?

Generally, no.

Under federal bankruptcy law, certain educational debts are not included in the ordinary bankruptcy discharge unless requiring repayment would impose an undue hardship on the borrower and the borrower's dependents.

That means a loan does not become dischargeable simply because it is:

• Delinquent
• In default
• In collections
• Several years old

A borrower may receive a discharge of other qualifying debts while remaining responsible for student loans.

Can Student Loans Ever Be Discharged in Bankruptcy?

Yes.

A borrower may ask the bankruptcy court to discharge qualifying student loan debt by demonstrating undue hardship.

This generally requires an additional lawsuit within the bankruptcy case called an adversary proceeding.

For certain federal student loans, the Department of Justice and Department of Education use a standardized process to evaluate these requests. The borrower provides information about income, expenses, repayment history, and other financial circumstances.

The government may recommend a full discharge, partial discharge, or no discharge. The bankruptcy judge ultimately decides the issue.

Struggling With Student Loans and Other Debt?

Bankruptcy may not automatically eliminate student loans, but it may provide relief from other qualifying debts and, in some circumstances, student loan discharge may be possible.

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What Does the Government Consider When Evaluating Undue Hardship?

For federal student loans subject to the current process, the government generally considers three broad questions.

Can You Currently Afford to Repay?

Income and reasonable expenses may be reviewed to determine whether making student loan payments would prevent the borrower from maintaining a basic standard of living.

Will the Financial Hardship Continue?

The evaluation may consider circumstances suggesting that the borrower's financial situation is unlikely to improve substantially during the repayment period.

Depending on the circumstances, factors involving age, disability, long-term unemployment, the age of the loans, or failure to complete the education financed by the loans may be relevant.

Have You Made a Good-Faith Effort to Address the Debt?

A borrower's history with the loan may also be considered.

Good faith can involve more than simply making payments. Depending on the circumstances, efforts to contact the servicer, seek deferment or forbearance, make payments when possible, or otherwise address the debt may be relevant.

Does Being in Default Prevent a Student Loan Discharge?

Not necessarily.

The circumstances that caused the default can matter.

For example, someone may have fallen behind after:

• Losing a job
• Developing a serious medical condition
• Experiencing a significant reduction in income
• Becoming unable to work
• Facing another major financial hardship

Default alone does not determine whether a borrower qualifies for an undue-hardship discharge. The broader financial circumstances and repayment history are considered.

What Happens to Student Loan Collections When You File Bankruptcy?

Filing bankruptcy generally triggers the automatic stay, which temporarily stops many collection activities involving debts that existed before the case was filed.

Depending on the circumstances, this may temporarily stop certain student loan collection efforts while the bankruptcy case is pending.

However, the automatic stay is not the same as a discharge.

If the student loan survives bankruptcy, collection may resume after the stay ends unless the borrower resolves the debt through another available option.

Can Bankruptcy Help Even If Your Student Loans Are Not Discharged?

Potentially.

Imagine someone has:

• $60,000 in student loans
• $25,000 in credit-card debt
• $15,000 in medical bills
• Several personal loans

If bankruptcy eliminates or restructures qualifying debts, the student loans may remain, but the borrower could have fewer other monthly obligations competing for limited income.

This is why bankruptcy should usually be evaluated based on the person's entire financial situation, not solely on whether student loans can be discharged.

Are There Alternatives for Defaulted Federal Student Loans?

Yes. Depending on the loan and current federal programs, options outside bankruptcy may also be available.

For example, loan rehabilitation may allow some borrowers with defaulted federal loans to restore their loans to good standing after completing the required payments.

Other repayment or default-resolution options may also be available depending on current federal rules.

A borrower dealing with both student loans and other significant debts may benefit from considering these options alongside bankruptcy rather than viewing them separately.

Key Takeaway

Student loan default does not automatically make the debt dischargeable in bankruptcy. However, some borrowers experiencing lasting financial hardship may be able to seek a full or partial discharge. Bankruptcy may also provide relief from other qualifying debts even when student loans remain.

How May a Bankruptcy Attorney Assist?

A bankruptcy attorney may help you review your student loans, other debts, income, and expenses to determine how bankruptcy could affect your overall financial situation.

An attorney may also explain the undue-hardship process, discuss whether Chapter 7 or Chapter 13 may be appropriate, and help you understand what could happen to student loans that remain after bankruptcy.

Legal representation does not guarantee that student loans will be discharged. The bankruptcy court determines whether the legal requirements for discharge have been satisfied.

Struggling With Defaulted Student Loans and Other Debt?

If student loans are only one part of a larger financial problem, Brock & Stout can help you understand how bankruptcy could affect your other debts and what options may be available.

Schedule a free consultation to discuss your bankruptcy options.

Frequently Asked Questions

Does default make student loans easier to discharge in bankruptcy?

Not automatically. Default alone does not establish undue hardship. The borrower's overall financial circumstances and other relevant factors must be considered.

Do student loans disappear after Chapter 7 bankruptcy?

Generally, covered student loans survive an ordinary Chapter 7 discharge unless the bankruptcy court determines that they are dischargeable or another applicable exception applies.

Do I have to take additional action to seek a student loan discharge?

Generally, yes. A borrower seeking an undue-hardship discharge typically must file an adversary proceeding within the bankruptcy case.

Watch: What Is Bankruptcy? | Brock & Stout Explains

Watch Episode 1 of Brock & Stout Explains for an introduction to bankruptcy and a better understanding of what it means for those considering debt relief.

This article is for general informational purposes and is not legal advice. Student loan and bankruptcy laws, policies, collection practices, and repayment programs may change. Every case depends on the borrower's loan type, financial circumstances, debts, and applicable law.