Department of Education on Bankruptcy and Student Loans

Most Chicagoans have heard that you can’t wipe out student loan debt when you file for bankruptcy. This is not exactly true—it is difficult but not impossible to discharge student loans in certain circumstances. Commentators remain concerned about the massive student loan debt in our country. In response, the U.S. Department of Education (DOE) recently released guidance about “how it will handle bankruptcy discharge requests for government-backed student loan debt,” according to a recent article in the Huffington Post.

Department of Education Places Burden on Students

According to the article, the guidelines from the DOE are helpful but they tend to place the heaviest burden on student borrowers. The DOE “wants to provide a balance between collecting on student loans except where those loans would pose an undue hardship on the debtor,” and thus is seeking a “balance in collecting debts versus allowing debts to be discharged.” Student borrowers still will need to prove that their loans create an undue hardship under this formula.

Commenters suggest that the DOE’s guidance does “give some hope to those seeking discharge of some student loan debt,” since it maintains that student loans may be discharged in cases of an undue hardship.

Is the DOE’s definition of undue hardship easier to meet than the definition many debtors have unsuccessfully tried to meet in bankruptcy court? In other words, many student borrowers who have filed for consumer bankruptcy have sought to have their student loans—both private and federal—discharged through Chapter 7 bankruptcy. However, the undue hardship requirements for such a discharge often prove pretty tough to meet.

So what does the government’s description of undue hardship look like?

Federal Government’s Undue Hardship Factors

Keep in mind that, if you seek to have student loan debt discharged in bankruptcy, the court is likely to use either the Brunner test or a “Totality of the Circumstances” test to determine whether you have an undue hardship. While courts can also use other tests, these two tend to be the most common. In providing its guidance on student loan discharge through bankruptcy, the DOE listed the factors that often (and should) play into determinations of undue hardship. Some of these factors include the following:

·      Whether the debtor filed for bankruptcy because of factors beyond her control;

·      Whether the debtor pursued income-driven repayment plans;

·      Whether the debtor made student loan payments when she had available resources;

·      Whether the student loan debt is the debtor’s only debt;

·      Whether the student loan debt has been owed for a long time;

·      Whether the debtor has reaffirmed other debts dischargeable through bankruptcy;

·      Whether the debtor is nearing retirement;

·      Whether the debtor’s health has changed since she incurred her student loan debt;

·      Whether a long time has passed since the debtor incurred her student loan debt; and

·      Whether the debtor currently has reasonable expenses.

We will need to wait and see how the new DOE guidance plays out in the courtroom. In the meantime, if you have questions about how filing for personal bankruptcy may be able to help with your debts, you should speak with an experienced Oak Park bankruptcy lawyer. Contact the Emerson Law Firm today to learn more about how we can assist you.

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