Possible Policy Change Concerning Student Loans and Personal Bankruptcy

If you owe a significant amount of debt and a portion of that debt includes federal student loans, you may be able to more easily have that debt discharged by filing for personal bankruptcy. According to a recent article in The Washington Post, a student financial aid point person for the U.S. Department of Education informed Congress “that the agency is working with the Justice Department to revise its bankruptcy policy for federal student loans.” This could mean that debtors who are struggling largely with student loan debt may soon be able to avoid the complicated process of seeking to have that debt discharged in bankruptcy even if there is not an overhaul of U.S. bankruptcy law.

Changing the Approach to Student Loan Debt

According to Richard Cordray, the current chief operating officer of the Office of Federal Student Aid, the current process for seeking a discharge of student loan debt in bankruptcy “doesn’t work well” and “needs to be reformed.” Speaking before a House education subcommittee, he emphasized that the Office of Federal Student Aid has been engaged in discussions with the Justice Department, and that there is agreement on a need to “revise [the] approach.”

Currently, in order to have student loan debt discharged in a bankruptcy case, the debtor needs to be able to prove that continuing to make payments on student loan debt would result in an “undue hardship.” There are also other tests that can be applied.

Understanding Potential Policy Changes in the Education Department

What would policy changes look like concerning discharging student loan debt in bankruptcy? The Education Department cannot amend existing U.S. bankruptcy law, but the article suggests that the Education Department may be able to set different “thresholds for a bankruptcy discharge,” and could alter or clarify the definition of an “undue hardship,” thereby allowing more debtors to discharge student loan debt in bankruptcy.

Intended Changes Will Not Affect Private Student Loans

It is important to note that any changes in the Education Department’s approach to student loans primarily concerns federal loans. As such, debtors who have significant private student loan debt that is private debt may need to wait for a larger overhaul of the U.S. bankruptcy system. Senator Elizabeth Warren has discussed the possibility of making sweeping changes to current U.S. bankruptcy law. The proposal, the Consumer Bankruptcy Reform Act, would eradicate individual Chapter 7 and Chapter 13 bankruptcies for consumers in favor of a more streamlined Chapter 10 bankruptcy, in addition to making it easier to discharge student loan debt in bankruptcy.

Regardless of whether the Consumer Bankruptcy Reform Act gains any traction or the Education Department makes changes to its approach, it is essential to know that, even under the current system, discharging student loan debt (whether federal or private) is not impossible. You should seek advice from an Oak Park bankruptcy attorney about your particular situation.

Contact Our Oak Park Bankruptcy Attorneys

If you have questions about discharging student loan debt in a consumer bankruptcy case, or if you have more general questions about filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy in Illinois, one of our experienced Oak Park bankruptcy lawyers can assist you. Contact the Emerson Law Firm today for help with your situation.



See Related Blog Posts:

What Happens to an Inheritance in Chapter 7 Bankruptcy?

Will Chapter 7 Bankruptcy Erase All of the Debt I Owe?

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