This long-held belief that “student loans can never be wiped out in bankruptcy” is a common misconception. While discharging student loan debt is significantly more challenging than other types of consumer debt, it is not impossible. The Bankruptcy Code permits discharge under specific conditions, most notably when repayment would impose an “undue hardship” on the borrower. Achieving a student loan discharge is a complex process that requires more than the standard bankruptcy filing. Although recent policy adjustments have streamlined the process, especially for federal student loans, discharge remains a demanding legal hurdle rather than an automatic outcome. Please continue reading as we explore what you should know about these matters and how our knowledgeable Gillette Bankruptcy Lawyers can assist you during these difficult times. 

How Are Student Loans Treated During Bankruptcy?

Generally, consumer debts are dischargeable in bankruptcy, but student loans are not automatically wiped out. Under U.S.C. § 523(a)(8), both federal and most private student loans survive discharge unless the debtor proves “undue hardship” through a separate lawsuit called an adversary proceeding. Some private loans may be dischargeable as regular unsecured debt if they don’t fit the § 523(a)(8) definition in bankruptcy law.

Wyoming courts use the three-part Brunner test for undue hardship, which requires proving an inability to maintain a minimal standard of living due to repayment, the financial situation will persist, and the debtor has made good faith efforts to repay. A minority of courts use a broader “totality of the circumstances” test. Judges usually consider long-term prospects, not just current finances.

How Do Student Loan Discharges Work?

Discharging student loans in bankruptcy is a complex process that demands a separate lawsuit called an adversary proceeding against the lender or government. To pursue a discharge, the debtor must ask the court to find that the loan creates “undue hardship.” This legal action involves formal steps like filing a complaint, engaging in discovery (document exchange, interrogatories, depositions), potential expert testimony, and a trial to determine if the undue hardship standard has been met.

The debtor bears the burden of proof, needing detailed, long-term evidence—not just dissatisfaction—to show financial constraints make repayment impossible. Essential evidence includes earnings/employment history, medical records (if applicable), a budget showing lack of disposable income, and records of prior repayment efforts. 

What Recent Developments Have Made Federal Student Loan Discharge More Accessible?

Federal student loan discharge cases are becoming more streamlined and standardized, thanks to guidance form the U.S. Departments of Justice and Education. The primary goal is to move away from automatically opposing every case and instead use more objective factors like income, expenses, age, disability, and repayment history to determine if “undue hardship” has been met. This new approach means:

  • Debtors submit an attestation form detailing their financial situation and circumstances.
  • Government attorneys review this information against internal criteria.
  • If the criteria are satisfied, the government may stipulate a full or partial discharge rather than engaging in aggressive litigation.

While this policy does not grant an automatic right to discharge, it has resulted in more federal borrowers successfully obtaining relief, particularly those with long-term financial hardship. Achieving student loan discharge remains a hurdle; however, understanding the stringent requirements is the critical first step for financial relief.

For more information, please don’t hesitate to contact an attorney at 307 Bankruptcy.