Student loan debt has become one of the most significant financial burdens facing many individuals today. For borrowers experiencing financial distress, bankruptcy may appear to offer a path toward relief. However, the treatment of student loans in bankruptcy differs significantly from most other forms of unsecured debt.
In most bankruptcy cases, filing triggers an automatic stay, which temporarily stops wage garnishments, collection calls, lawsuits, and other collection activity. While this protection can provide meaningful breathing room for borrowers, student loans are treated differently from most other debts and often remain enforceable after the bankruptcy case concludes.
At Scura, Wigfield, Heyer, Stevens & Cammarota, LLP, we frequently speak with individuals who are surprised to learn that student loans are not automatically discharged through bankruptcy. Nevertheless, bankruptcy can still play an important role in stabilizing a borrower’s financial situation and, in certain cases, may provide a pathway toward discharge.
This article explains how student loans are treated in bankruptcy and what borrowers in New Jersey should understand before filing.
The General Rule: Student Loans Are Presumptively Nondischargeable
Under federal bankruptcy law, student loans are generally nondischargeable unless the debtor proves that repayment would impose an undue hardship on the debtor and the debtor’s dependents.
This principle is codified in 11 U.S.C. § 523(a)(8), which provides that educational loans made, insured, or guaranteed by a governmental unit or any qualified education loan as defined by the Internal Revenue Code are not discharged in bankruptcy absent a showing of undue hardship.
Courts have consistently emphasized the strong public policy underlying this rule. For example, in Lozner v. Lozner, 388 N.J. Super. 471 (App. Div. 2006), the New Jersey Appellate Division recognized that student loan obligations are subject to heightened protections and cannot be discharged without satisfying the undue hardship standard.
Similarly, in New Jersey Higher Educ. Assistance Authority v. Pennell, 377 N.J. Super. 13 (App. Div. 2005), the court reaffirmed that student loans may only be discharged if the debtor demonstrates undue hardship through proper legal procedures.
Because of this statutory framework, borrowers should understand that filing bankruptcy does not automatically eliminate student loan debt.
Proving “Undue Hardship” in Bankruptcy
To attempt to discharge student loans, the debtor must file a separate lawsuit within the bankruptcy case known as an adversary proceeding.
Under Federal Rule of Bankruptcy Procedure 7001, a debtor seeking to determine the discharge ability of student loans must file and serve a complaint against the lender requesting that the court determine whether repayment would impose an undue hardship.
The debtor bears the burden of proof. Courts evaluate the debtor’s financial condition and future prospects to determine whether repayment would create a hardship severe enough to justify discharge.
As the court explained in Pennell, merely asserting hardship in a bankruptcy plan is insufficient. Instead, the debtor must present substantive evidence demonstrating that repayment would impose an undue hardship.
Although the precise test varies somewhat by jurisdiction, courts often evaluate factors such as:
- the debtor’s current income and expenses
- the debtor’s future earning potential
- whether the debtor has made good-faith efforts to repay the loan
Because the burden of proof is high, successful student loan discharges in bankruptcy remain relatively uncommon. Nevertheless, recent developments in federal policy have encouraged lenders and government agencies to more carefully evaluate hardship claims.
How Bankruptcy Chapters Affect Student Loan Debt
When evaluating how student loans will be treated in bankruptcy, the outcome often depends in part on the type of bankruptcy case filed. Individuals typically file either Chapter 7 or Chapter 13 bankruptcy.
Because student loans are generally nondischargeable debts, their treatment differs from the treatment of most other unsecured obligations such as credit card debt or medical bills.
Understanding how each chapter works can help borrowers evaluate their options.
Chapter 7 Bankruptcy and Student Loans
Chapter 7 bankruptcy is often referred to as a liquidation bankruptcy and is designed to give individuals a relatively quick financial reset. In most cases, a Chapter 7 case lasts approximately four months from filing to discharge.
During this process, many unsecured debts, such as credit cards and medical bills may be eliminated.
Student loans, however, are treated differently. Unless the debtor files an adversary proceeding and successfully proves undue hardship under 11 U.S.C. § 523(a)(8), the student loan debt will generally survive the bankruptcy discharge.
Despite this limitation, Chapter 7 bankruptcy can still provide meaningful relief. By eliminating other debts, the borrower may improve their financial position and make student loan payments more manageable once the case concludes.
Additionally, the automatic stay under 11 U.S.C. § 362 temporarily stops student loan collection activity during the bankruptcy case.
More information about the automatic stay is available from the United States Courts.
Chapter 13 Bankruptcy and Student Loans
Chapter 13 bankruptcy is commonly referred to as a reorganization bankruptcy. Unlike Chapter 7, Chapter 13 allows individuals with regular income to restructure their debts and repay a portion of what they owe through a court-approved repayment plan.
A Chapter 13 case typically lasts three to five years. During this time, the debtor makes monthly payments to a bankruptcy trustee, who distributes funds to creditors according to the confirmed plan.
Chapter 13 is often used to:
- stop foreclosure proceedings
- cure mortgage arrears
- repay certain tax debts
- protect assets that might otherwise be liquidated
For borrowers with substantial student loan debt, Chapter 13 can provide temporary relief from collection activity while the debtor reorganizes their overall financial situation.
However, because student loans are generally nondischargeable, the remaining balance typically survives the bankruptcy case unless the debtor successfully proves undue hardship through an adversary proceeding.
How Student Loans Are Treated in a Chapter 13 Plan
Although student loans usually survive bankruptcy, Chapter 13 offers flexibility in how they may be handled during the repayment plan.
Separate Classification of Student Loans
Under 11 U.S.C. § 1322, a Chapter 13 plan may classify unsecured claims into different categories as long as the classification does not unfairly discriminate against other creditors.
Courts have sometimes allowed separate classification of student loan debt because it is nondischargeable. This can help prevent the borrower from exiting bankruptcy with a dramatically larger balance caused by accruing interest.
However, the plan must still treat creditors fairly and cannot discriminate without a legitimate justification.
Interest Continues to Accrue
Interest on nondischargeable student loan debt generally continues to accrue during the life of the Chapter 13 case.
Although 11 U.S.C. § 502(b)(2) disallows claims for unmatured interest against the bankruptcy estate, courts have held that this rule does not eliminate the debtor’s personal liability for interest on nondischargeable debts.
In Leeper v. Pennsylvania Higher Education Assistance Agency, 49 F.3d 98 (3d Cir. 1995), the United States Court of Appeals for the Third Circuit held that post-petition interest on nondischargeable student loan debt remains the debtor’s responsibility and may be collected after the bankruptcy case concludes.
As a result, borrowers may find that their student loan balance continues to grow during the bankruptcy process.
Special Rules for New Jersey NJCLASS Student Loans
New Jersey borrowers should also be aware of state-specific student loan programs such as NJCLASS loans, administered through the New Jersey Higher Education Student Assistance Authority.
Under N.J. Stat. § 18A:71C-31.2, NJCLASS loans may be discharged in certain limited circumstances, including cases involving total and permanent disability, provided the borrower submits appropriate medical certification.
However, if the loan was obtained with a co-signer, that co-signer generally remains liable for repayment even if the borrower files for bankruptcy.
This obligation is reflected in N.J.A.C. § 9A:10-6.17, which provides that co-signers may remain responsible unless the borrower dies or becomes permanently disabled.
Because of these additional rules, borrowers with NJCLASS loans should carefully review their obligations before filing bankruptcy.
Why Bankruptcy Can Still Help Student Loan Borrowers
Even when student loans are not discharged, bankruptcy can still provide meaningful financial relief.
By eliminating other debts and temporarily halting collection activity, bankruptcy can allow borrowers to stabilize their finances and regain control over their financial future.
In our experience representing clients throughout New Jersey, many borrowers use bankruptcy as a strategic tool to reorganize their financial lives, eliminate burdensome debt, and create a more manageable path forward.
Choosing the Right Bankruptcy Law Firm in New Jersey
Bankruptcy law is complex and highly procedural. Successfully navigating the process requires experienced legal professionals who understand federal bankruptcy law, local court rules, and creditor practices.
When choosing a bankruptcy law firm, individuals should consider:
- the firm’s experience handling Chapter 7 and Chapter 13 cases
- the firm’s familiarity with student loan discharge litigation
- client reviews and reputation within the community
- whether the attorneys take time to explain the process clearly
A knowledgeable bankruptcy attorney should guide you through every stage of the case, helping you understand your options while minimizing stress during an already difficult time.
The Bankruptcy Lawyers at Scura, Wigfield, Heyer, Stevens & Cammarota, LLP Are Here to Help
At Scura, Wigfield, Heyer, Stevens & Cammarota, LLP, we understand that financial hardship can feel overwhelming. Our attorneys work closely with clients to evaluate their financial circumstances and develop thoughtful strategies for addressing debt through bankruptcy.
If you are struggling with student loan debt and considering bankruptcy, we encourage you to speak with an experienced bankruptcy attorney about your options.
Early legal guidance can help you understand how student loans will be treated in your case and whether bankruptcy may provide the financial relief you need.
Contact our office today to schedule a consultation and take the first step toward rebuilding your financial future.
