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Discharging Student Loan Debt in Bankruptcy May Soon Be Easier

student carrying Ball of debt

In the United States, student loan borrowers collectively owe almost $1.5 trillion in student debt.  A recent U.S. Department of Education report found that nearly 40% of those loans may go into default by 2023; the rates are even worse for students at for-profit schools.  Despite this massive burden, discharging either private or federal student loan debt in bankruptcy is nearly impossible under current law.  Student loan debt cannot be discharged in bankruptcy filings outside of very limited exceptions, including an exception for “undue hardship.”  The DOE recently announced it will be reviewing current debt-relief policies for student loans, thus opening the door to changing those policies that make it so difficult to discharge student debt–particularly by providing a more clear and attainable “undue hardship” standard.

The current “undue hardship” standard is nearly impossible to satisfy

Under current law, a federal student loan borrower must actually sue the government seeking discharge and must show “undue hardship,” in addition to the other requirements for filing bankruptcy.  Undue hardship is not clearly defined by statute, and case law has left it both ambiguous and extremely difficult to satisfy.  Under the primary test in the case law (the “Brunner” test), borrowers must show: that they cannot maintain a minimal standard of living if forced to repay the loan; that their financial struggles will continue for a large portion of the loan repayment period; and that they have made good faith efforts to repay the loan.  The other test simply provides factors for the court to evaluate (the debtor’s resources, expenses, etc.), and the borrower still faces a very difficult burden of proof. 

The DOE is considering a fix for the “undue hardship” standard

In February, the DOE issued a Request for Information seeking public comments on the existing standards for satisfying “undue hardship.”  The DOE intends to review the comments and data received and consider whether to alter how undue hardship claims by student loan borrowers in bankruptcy are evaluated.  Specifically, the DOE is evaluating the factors considered in evaluating undue hardship claims, how those factors are weighed, and whether to add additional considerations to the test (in addition to reviewing the problems caused by having multiple tests floating around for different borrowers depending on jurisdiction).  The DOE’s Request follows strong advocacy by consumer groups hoping to ease the burden on the millions facing crippling student debt. 

However, even if the DOE moves forward with efforts to change the policies, borrowers seeking to discharge student debt in bankruptcy will still face a very high burden:  Borrowers still need to sue the federal government seeking discharge, and while the policy may affect whether and how the DOE will defend against those suits, the DOE policies have limited effect on how a court will evaluate the claims in those lawsuits.  To change the procedures required for student loan borrowers to discharge debt in bankruptcy, Congress would need to act.   

If you have student loans or other debts and are looking for possible relief, contact the compassionate and dedicated Germantown consumer debt lawyers at Haeger Law for a consultation, at 888-463-3520.