Student Loans and Bankruptcy: Federal Private




MANY CONGRESS REPRESENTATIVES CLAIM THEY NEVER HEAR FROM STUDENT LOAN BORROWERS, FIX THIS BY FINDING YOUR REPRESENTATIVES AND SENDING THEM A LETTER, if you would like the attorney to provide you with some written communications that you can copy and customize to your taste do hesitate to contact her. Kathryn Tokarska is actively communicating with various individuals and organizations fighting for student loan debt cancellation:



Keeping up to date on events regarding student loans by running a topic search on C-SPAN and then sort the results by date.


Advice for individuals in financial trouble because of student loan debt is to please try and be involved. This may seem difficult, given all the stress and strain in facing default, but it is critical. There are groups and organizations looking for support to make positive changes for people who struggling with student loans:


Current Bankruptcy laws provide that all student loans (be it private loans or government backed federal loans) are not dischargeable, unless debtor proves in court that repaying the loans is “undue hardship”. It is insufficient to file a bankruptcy case. A separate adversarial action must also be filed. The legal code does not include a definition of what is a “undue hardship”. In each jurisdiction, Judges apply a test to the debtor’s circumstances.

Most jurisdictions use a 3 prong test known as the Brunner Test named for a case Brunner v. New York State Higher Education Services Corp (46 B.R. 752). It requires that a borrower show 3 things:

  1. that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans;
  2. that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
  3. that the debtor has made good faith efforts to repay the loans.

While on the surface it may seem like one could/would qualify, subsequent cases show that without a long term disability it is extremely difficult if not impossible to overcome the test in order to obtain dischargeability as Judges strictly rule on what is considered “good faith efforts” and “whether the state of affairs is likely to persist for a significant portion of the repayment period”. Typically, people with income that does not exceed 150 percent of the poverty level are considered “low income individuals”. But, don’t forget the two other prongs of the test as all 3 must be met.

To paraphrase Senator Durbin the test says that the borrower needs to show “certainty of hopelessness” or prove that the future is likely to be as bad as the present, to qualify for an “undue hardship” exception to discharge student loans. Since the borrower must prove a negative, the only certainty is the hopelessness of their case.


Since the late 1970’s, tuition has risen 900%, coupled with the current economic crisis, unemployment rates particularly among the 18-24 year olds, and the rising student loan balances, many recent graduates feel like they graduated off a cliff with monthly repayment equivalent to a typical mortgage on a starter home, leaving little to no room for housing expenses.

In a student loan discussion, it is important to distinguish between the different types of student loans. The first important distinction is between federal and private student loans. Many individuals with multiple loans may not be aware of which type of loans they hold and/or who is servicing them.


GET ORGANIZED: To obtain detail information about your federal loans: the number of loans, types, principal balances, repayment status, and the name & contact information for the entity servicing them go to National Student Loan Data System for Students

Federal loans offer several options for borrowers to avoid default. Two programs available since 2009, Income Based Repayment and Income Contingent Repayment are helping borrowers avoid default.

April 2010 Update

Important information regarding new student loan repayment options on federal student loans:
Income-Based Repayment (IBR) is a new way to make your federal student loan payments more manageable. And if you’re a teacher or work in government or at a nonprofit (501(c)(3)) organization, you might qualify for a new type of public service loan forgiveness after 10 years of eligible payments and employment… (more info click here)

Applying for IBR

Note, even If you qualify, you will not be automatically placed into this program. To go into the program, you must actively apply for it. Contact your loan servicer (often the necessary forms are available online). You will need to include with your application some supporting documents. Read the instructions carefully. At minimum, you will probably have to provide an IRS form requesting that a transcript of your latest tax return be provided to the lender for scrutiny. Here is a form, but your loan servicer may have a different version available online: Form 4506-T

Depending on your circumstances, you might qualify for NO PAYMENT plan and avoid default. My advice is to send your paperwork registered mail to prevent claims that the application was not received. Particularly if your loan servicer is also handling your private student loans.

Under federal loans, borrower is considered to be in default when the loan payment becomes 180 days delinquent. Defaulting on Federal loans has serious consequences including wages and/or social security garnishment, bank levy, interception of tax refunds, inability to apply for additional financial aid, revoking professional licenses. Keep in mind, that if you have multiple loans with multiple loan servicing agencies, you will need to contact each agency separately or if possible apply for a consolidation.


One major distinguishing feature of these loans is that they are not government guaranteed. These are simply put, promissory notes, the proceeds of which were used to fund the borrower’s education. Typically, these loans are used by students entering professional degree programs to fill in the gap between the cost of education and the maximum amounts provided under federal loan program.

Unlike, federal loans, which are guaranteed by the federal government, typical credit collection rules just like any other unsecured debt with one major exception. Unlike credit cards, the private student loans are not dischargeable in Bankruptcy except as discussed above.


As discussed above it is extremely difficult to obtain a discharge of student loans, regardless whether these are government guaranteed loans or private. Unless a petitioner prevails in an adversarial action during the pendency of their Chapter 7 case, the filing of the case does trigger protection of the “automatic stay”. The lenders are supposed to cease any/all collection efforts until either a) a relief of stay motion is granted or b) the debtor’s case closes post discharge or is dismissed. The creditors typically wait until the case closes and resume demands for payment.


Student loans, like credit card debt is considered an unsecured debt. As such, these creditors are paid the prorate share from the monthly Chapter 13 payments. Depending on your plan, that could mean little to no money will be received while the case remains open. Upon discharge and/or close of the Chapter 13 case, the creditors resume demands for payments.