Wednesday, March 14, 2018

Bankruptcy May Soon Help Student Loan Borrowers

Can I discharge my student loans in a Chapter 7 bankruptcy?

Americans today are heavily burdened by student loan debt.  Cumulatively, Americans owe more than $1.48 trillion in student loan debt with over 44 million borrowers, according to federal government statistics.  At least 11 percent of borrowers are currently delinquent and borrowers repay on average a whopping $351 per month to stay current on their student loan debts.  Under federal bankruptcy laws, few student loan borrowers can find relief by filing a Chapter 7 action.  However, that may soon change under the Trump administration. 

Student Loans Under Current Bankruptcy Laws

Federal bankruptcy laws severely limit a borrower’s ability to eliminate student loan debt.  Student loan debts can only be discharged if you can prove that repayment represents an undue hardship.  Hardship is usually evaluated under what is known as the Brunner Test.  The test will require that you prove:
  • You could not maintain a basic standard of living if forced to repay your student loans;
  • Your hardship will last for the majority of your repayment period;
  • You tried to repay your student loans up until this point.

Discharge of student loan debts is granted only in limited circumstances where the borrower is in dire straits.  For the majority of student loan debtors, you could not currently erase your debts by filing for Chapter 7 bankruptcy.
Proposed Changes to Bankruptcy Laws and Student Loan Debt 
With so many borrowers struggling to repay their massive student loan debts, many are calling for the federal government to take action to help borrowers.  Recently, the Education Department announced that it will review whether student loan borrowers can discharge their student loan debt in bankruptcy.  The Department is currently seeking public comments concerning how courts should evaluate undue hardship to assess who should receive a discharge in Chapter 7 bankruptcy. 
New standards could bring the discharge of student loan debts more in line with traditional bankruptcy tests.  For now, student loan borrowers in financial trouble should start by exploring their options for deferment, forbearance, or an income-based repayment plan. Contact a bankruptcy attorney for more information as to whether bankruptcy may be a viable option for you.

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