Proposed Changes to Student Loans in Bankruptcy

: Chris Lee Law Firm

  Filed under: bankruptcy_blog

Student loan debt is extremely difficult to wipe out in bankruptcy, even for an experienced Dallas bankruptcy attorney. Even though student loan debt is technically unsecured, non-priority debt (the kind that gets eliminated in bankruptcy), borrowers must demonstrate an “undue hardship” which is an exceedingly high bar to reach. Borrowers, bankruptcy judges, and bankruptcy lawyers alike are all expecting big changes this year, however, and we could see a change in federal bankruptcy laws soon. This could be a huge boon to Americans who are struggling to pay back student loans or have no hope of ever paying them off.

The Brunner Test and Student Loan Debt

In Bankruptcy Court, individuals wishing to reduce or wipe out student loan debt must meet three specific criteria in order to justify eliminating the loan amount. First, you must not be able to maintain a minimal standard of living. Next, you must show that your financial situation will remain below the minimum standard of living for the majority of your repayment period during bankruptcy. Finally, you must be able to prove a good faith effort in repaying your student loans back. Less than 1% of individuals are able to obtain a discharge of student loan debt using bankruptcy.

Department of Education Request for Information

In February of 2018, the U.S. Department of Education published an official request of information entitled, “Request for Information on Evaluating Undue Hardship Claims in Adversary Actions Seeking Student Loan Discharge in Bankruptcy Proceedings”. Over 400 comments poured in from concerned student loan borrowers who believe that student loan debt should be able to be discharged using bankruptcy.

Public Opinion on Student Loan Discharge

Any changes to bankruptcy law will have to be done so by Congress, but the Department of Education is proposing changes to the factors which determine undue hardship caused by student loans. Many borrowers stifled with debt welcome changes to the bankruptcy code which as barred student borrowers from discharging student loan debt for over 40 years. Dissenters of the move worry that making it easier to discharge student loan debt could have negative consequences on the entire student loan program in our Country.

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