Private vs Federal Student Loan Discharge Options During Bankruptcy

Quick overview

Discharging student loans in bankruptcy is possible but uncommon. Federal student loans are protected by federal policy and case law; a borrower must file a separate adversary proceeding and typically show “undue hardship.” Private student loans—originated by banks, credit unions, or other lenders—follow contract terms and state law, and may be discharged, settled, or otherwise negotiated more often than federal loans, depending on the facts and the lender.

In my 15 years advising clients, the practical difference boils down to process and leverage: federal loans require a high legal standard and formal litigation; private lenders are more likely to negotiate, settle, or be vulnerable to state-law defenses. (U.S. Department of Education; Consumer Financial Protection Bureau.)

Sources: U.S. Department of Education, consumerfinance.gov.

How the law treats federal student loans in bankruptcy

Federal student loans are subject to a strict judicial standard. Since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, courts have generally required proof of “undue hardship.” The most commonly applied test is the Brunner test (from Brunner v. New York State Higher Education Services Corp.), which requires a borrower to show all three elements:

1. The debtor cannot maintain a minimal standard of living for themselves and dependents if forced to repay the loans.
2. Additional circumstances indicate this state of affairs is likely to persist for a significant portion of the repayment period.
3. The debtor has made good-faith efforts to repay the loans (applications for deferment, income-driven plans, attempts to negotiate).

Some bankruptcy courts or circuits use a “totality of the circumstances” test instead of Brunner—this looks at the borrower’s overall financial picture rather than a rigid three-part formula. Either way, the burden of proof is on the borrower, and courts require detailed, current financial documentation. See the Consumer Financial Protection Bureau’s overview on student loans and bankruptcy for practical guidance: https://www.consumerfinance.gov/consumer-tools/student-loans/.

Important procedural point: to seek a discharge of student loans you must file an adversary proceeding inside your bankruptcy case (essentially a separate lawsuit within the bankruptcy). Don’t expect the standard bankruptcy discharge to automatically wipe out student loans. For background on court procedures, consult the U.S. Courts or speak with a bankruptcy attorney.

Practical note from my practice: Courts often weigh age, health, employability, and realistic income prospects heavily. A young professional with temporary unemployment will have a harder time than an older borrower with permanent disability.

How private student loans differ in bankruptcy

Private student loans are contracts between the borrower and a private lender. They are not backed by the federal government, so the lender’s internal policies and state consumer-credit laws matter. Private loans can be discharged under the same undue-hardship standards as federal loans, but other pathways are more common:

• Settlement or negotiated discharge: Private lenders may accept a lump-sum settlement or reduced payoff outside of court. Negotiation is often effective when the borrower can present clear hardship documentation and limited recovery prospects for the lender.
• Litigation defenses: Some private loans may be subject to state-law defenses (statute of limitations on collections, predatory-lending claims, fraud in the inducement, or the lender’s failure to follow state licensing rules). These defenses can lead to dismissal or reduction of debt.
• Co-signer issues: Bankruptcy can affect co-signers. Even if the primary borrower’s loan is discharged, a co-signer’s liability may remain unless the lender agrees otherwise or the co-signer also files.

A helpful FinHelp resource on negotiating private loans is our guide: “Negotiating a Settlement on Private Student Loans: Steps and Risks” (https://finhelp.io/glossary/negotiating-a-settlement-on-private-student-loans-steps-and-risks/).

In short: private lenders have more procedural and commercial incentives to settle; federal loans generally do not.

Chapter 7 vs Chapter 13: different paths and outcomes

• Chapter 7 (liquidation): If eligible, Chapter 7 can discharge many unsecured debts quickly, but student loans will remain unless you win an adversary proceeding showing undue hardship. Private lenders may be more willing to negotiate after a Chapter 7 filing because their recovery options are limited.

• Chapter 13 (repayment plan): Chapter 13 lets you propose a 3–5 year repayment plan. Student loans are typically non-dischargeable in the plan unless undue hardship is proven; however, Chapter 13 can help by consolidating payments, stopping wage garnishment, and creating negotiation space with private lenders. See our article on “Chapter 13 and Student Loans: What Repayment Looks Like” for specifics: https://finhelp.io/glossary/chapter-13-and-student-loans-what-repayment-looks-like/.

Procedural steps to seek discharge (federal or private)

1. Consult a bankruptcy attorney experienced with student loans. An attorney can evaluate whether Brunner or a totality test is likely to succeed in your circuit.
2. Gather documentation: tax returns, pay stubs, a budget showing monthly living expenses, medical records, disability documentation, job-search records, loan statements, and correspondence about income-driven repayment or deferments.
3. File the bankruptcy petition (Chapter 7 or 13) and, promptly, an adversary complaint asking the court to discharge the student loans for undue hardship.
4. Exchange financial records in discovery and prepare for a hearing or trial. Expect the court to examine your ability to work, past repayment behavior, and projected future income.
5. If you lose the adversary proceeding for federal loans, you still have options: pursue income-driven repayment (IDR), apply for Public Service Loan Forgiveness (PSLF) if eligible, consider rehabilitation programs, or explore negotiation for private loans.

Source for adversary proceedings and court process: U.S. Courts (uscourts.gov) and Consumer Financial Protection Bureau (consumerfinance.gov).

Practical strategies, based on experience

• File an adversary proceeding only with good grounds and solid documentation. Frivolous claims can be expensive.
• Apply for or document participation in income-driven plans and deferments before filing—showing you tried to manage the debt strengthens a hardship claim.
• For private loans, start negotiation early. Lenders may accept settlements or allow loan modifications to avoid litigation costs.
• Consider refinancing only with care: refinancing a federal loan into a private loan eliminates federal protections (IDR, PSLF). Evaluate this trade-off with a counselor or attorney.
• If disability or closed-school discharge might apply, pursue those administrative routes with the Department of Education before (or in parallel with) bankruptcy. See FinHelp’s explainer on closed-school discharges: https://finhelp.io/glossary/how-closed-school-discharges-work-for-federal-student-loans/.

Common mistakes I see

• Assuming bankruptcy will automatically clear student loans. It won’t—unless you win an adversary proceeding.
• Relying only on emotion; courts need concrete evidence and documentation.
• Refinancing federal loans without understanding lost benefits like IDR or PSLF.
• Failing to list co-signers or failing to consider their exposure.

Frequently asked questions

Q: Are federal student loans ever discharged in bankruptcy? A: Yes, but it’s rare and typically requires proving undue hardship through an adversary proceeding. Q: Are private student loans easier to discharge? A: Often yes—private lenders have commercial motives to settle and may be subject to state-law defenses—but outcomes vary widely.

Next steps and resources

If you’re considering bankruptcy to address student loans:

• Talk to a bankruptcy attorney with student-loan experience. Legal representation meaningfully increases the odds of a favorable outcome when pursuing undue hardship. In my practice, borrowers who document long-term disability or realistic permanent income limitations have the strongest cases.
• Use nonprofit counseling resources and the Department of Education’s borrower tools to track repayment options: https://studentaid.gov/.
• Read the CFPB’s plain-language guides for actionable steps: https://www.consumerfinance.gov/.

Further reading on FinHelp:

• Discharging Private Student Loans: Options and Legal Challenges — https://finhelp.io/glossary/discharging-private-student-loans-options-and-legal-challenges/
• Chapter 13 and Student Loans: What Repayment Looks Like — https://finhelp.io/glossary/chapter-13-and-student-loans-what-repayment-looks-like/
• How Closed School Discharges Work for Federal Student Loans — https://finhelp.io/glossary/how-closed-school-discharges-work-for-federal-student-loans/

Sources & authoritative references

• U.S. Department of Education, Federal Student Aid: https://studentaid.gov/
• Consumer Financial Protection Bureau, Student Loans & Bankruptcy: https://www.consumerfinance.gov/consumer-tools/student-loans/
• Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987) (common undue-hardship test)
• Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Congress)
• U.S. Courts — Rules on adversary proceedings: https://www.uscourts.gov/

Professional disclaimer

This article is educational and does not constitute legal advice. Bankruptcy and student-loan law are fact-specific and vary by jurisdiction. Consult a qualified bankruptcy attorney for advice tailored to your situation.