By Brian Figeroux, Esq.

Discharging student loans through Chapter 7 bankruptcy in New York City in 2025 is a complex process that requires careful navigation of legal procedures and a thorough understanding of the criteria involved. While traditionally challenging, recent developments have provided clearer guidelines to assist borrowers in seeking relief. This article offers a step-by-step analysis of the process.

Understanding the Challenge

Historically, discharging student loans in bankruptcy has been difficult due to stringent requirements. Under Section 523(a)(8) of the Bankruptcy Code, student loans are not automatically discharged unless the debtor can demonstrate “undue hardship.” This necessitates initiating an adversary proceeding within the bankruptcy case. 

Step 1: Assess Eligibility for Chapter 7 Bankruptcy

Before addressing student loans, determine if you qualify for Chapter 7 bankruptcy. This involves passing the means test, which compares your income to the median income in New York. If your income is below the median, you typically qualify. If above, further calculations regarding disposable income are necessary. 

Step 2: File for Chapter 7 Bankruptcy

Once eligibility is confirmed, file a petition with the U.S. Bankruptcy Court for the Southern or Eastern District of New York, depending on your residence. This includes submitting detailed schedules of assets, liabilities, income, and expenses. Upon filing, an automatic stay is enacted, halting most collection activities. 

Step 3: Initiate an Adversary Proceeding

To seek discharge of student loans, file a separate lawsuit within the bankruptcy case known as an adversary proceeding. This involves submitting a complaint outlining your financial situation and asserting that repaying the student loans would cause undue hardship. 

Step 4: Demonstrate Undue Hardship

Courts commonly use the Brunner test to evaluate undue hardship, which requires showing:

1. Minimal Standard of Living: Repaying the loan would prevent you from maintaining a minimal standard of living.
2. Persistence of Financial Situation: Your current financial situation is likely to persist for a significant portion of the repayment period.
3. Good Faith Effort: You have made good faith efforts to repay the loan.

Providing comprehensive documentation, such as income records, expense reports, employment history, and records of prior loan payments, is crucial to substantiate these claims. 

Step 5: Engage in the Legal Process

After filing the adversary proceeding, the case proceeds through the legal system, which may involve:

• Discovery: Exchange of information between parties.
• Negotiations: Potential settlement discussions with the loan holder.
• Trial: If no settlement is reached, presenting your case before a judge.

Given the complexity, consulting with a bankruptcy attorney experienced in student loan discharge is advisable.

Recent Developments

In November 2022, the Department of Justice and the Department of Education issued new guidelines to simplify the process for discharging federal student loans in bankruptcy. These guidelines provide clearer criteria for demonstrating undue hardship, potentially making it more accessible for borrowers to obtain relief. 

Conclusion

While discharging student loans through Chapter 7 bankruptcy in New York City is challenging, understanding the process and recent developments can aid in navigating this complex legal landscape. Professional legal assistance is highly recommended to improve the likelihood of a favorable outcome.

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