New Bankruptcy Rules for Student Loan Debt?


If you are struggling with student loan debt, you may know that it can be extremely difficult to discharge student loans through personal bankruptcy. Debtors typically need to show that continuing to make payments on their student loans would constitute an “undue hardship,” and it can be tough to meet this burden. For quite some time now, consumer protection advocates have been pushing for a change when it comes to consumer bankruptcy rules and student loan debt. According to a recent article in U.S. News & World Report, “momentum is building for new rules that would make it easier to discharge federal student loans during bankruptcy.”
What should consumers know about possible changes to consumer bankruptcy rules?
Proposed Legislation Aims to Broaden Undue Hardship Test
Currently, the undue hardship test is difficult for many consumers to pass in order to qualify for a discharge of their student loan debt in bankruptcy. In order to make bankruptcy an option for consumers who are struggling with student loan debt, newly proposed legislation aims to broaden the undue hardship test so that more debtors may be able to meet its requirements.
The proposed legislation known as the Higher Ed Act (H.R. 5549), was introduced by Peter DeFazio, a Democrat from Oregon, earlier this year. There is no clear definition of what constitutes an undue hardship. Instead, courts must make a determination, and it is frequently difficult for consumers to pass the test. After the Higher Ed Act was proposed, the Department of Education “issued a request for public comment to collect data and feedback on whether there is a need to modify how undue-hardship claims by student loan borrowers in bankruptcy are evaluated.”
How the Current Undue Hardship Test Discourages Debtors From Filing for Bankruptcy
Independent researchers have determined that the undue hardship test often discourages student loan borrowers from filing for bankruptcy because they assume they will not be eligible for a discharge. A study conducted at the University of Pennsylvania Law School determined that “nearly 40 percent of borrowers who include their student loans in their bankruptcy filing ended up with some or all of their student debt discharged, but only 0.1 percent of people who filed for bankruptcy attempted to discharge their student loans.”
Most bankruptcy courts use the Brunner test for determining whether a borrower has an undue hardship. To pass the Brunner test, debtors must be able to show the following:
  • Debtor would not be able to meet minimum standard of living if the debtor continued to pay on the student loans;
  • Debtor’s financial difficulties are not temporary; and
  • Debtor made efforts to try to pay student loan debt.
One possible change to the bankruptcy rules is that certain elements of the Brunner test would be given more weight than others, making it more feasible to pass the test and to discharge student loan debt. In the meantime, we will need to wait for an answer on the proposed legislation.
Discuss Your Situation with an Oak Park Bankruptcy Attorney
Are you struggling to repay student loan debt? Do you have questions about whether consumer bankruptcy could help you to get back on track with your finances? A dedicated consumer bankruptcy lawyer in Oak Park can discuss your options with you today. Contact the Emerson Law Firm to learn more about the services we provide to consumers throughout Chicagoland.
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