Did Student Loan Dischargeability in Bankruptcy just get Easier?

The answer is YES, and here’s why!

There is good news for low income, student loan borrowers who are struggling to repay their loans. A new process has been put in place that will help with transparency and consistency when it comes to granting a discharge of student loans in bankruptcy. This new process will make it easier for low-income borrowers to take advantage of the few options available to them that can help get rid of some, or all, of their student loan debt.

The process of discharging your student loans in bankruptcy begins with a borrower filing an “adversary proceeding”, or a separate lawsuit with their bankruptcy case. Under the new process, within the adversary proceeding lawsuit the borrower submits an affidavit and supporting documents to the judge. The judge must then determine if the borrower has demonstrated undue hardship in repaying the loans and meets all requirements under federal law.

Before this change was implemented, each bankruptcy judge’s requirements to show undue hardship could be different. The new process helps with transparency and consistency by laying out requirements in a more objective method. Additionally, the new method allows the student loan servicer to stipulate to the facts when the borrower provides specific documentation as required by these new guidelines.

The new process involves a review of three factors by the bankruptcy judge:

Present ability to pay:

If a debtor’s expenses equal or exceed the debtor’s income, then they lack the ability to pay. The expenses will reflect the IRS and justice department standards for things like housing, food, and transportation.

Future ability to pay:

The assessment of a borrower’s ability to pay includes factors such as retirement age, disability, extended unemployment history, or lack of a degree. Here, the court is looking at whether a borrower’s circumstances are likely to change and whether they would be able to make payments toward student loans in the future.

Good faith efforts:

The new process provides objective criteria about whether the borrower has made reasonable efforts to earn income, manage expenses and to repay the student loan. Efforts to repay the student loan may include making contact with the student loan servicer regarding payment options, or electing income-based repayment.

The new process for student loan dischargeability in bankruptcy provides a more consistent framework for borrowers seeking relief from the hardship of student loans. If you are struggling to repay your student loans, this new process may provide an easier path to relief if you meed the three qualifications above. Be sure to speak with an attorney to learn more about how this process may impact your specific situation.

Final Note:

The information in this blog is not legal advice and should not be used as a substitute for professional legal advice. If you need assistance with your student loans, please contact a qualified attorney or financial adviser.