Changes Coming to Student Loan Bankruptcy Rules
The Department of Education is reviewing the current ‘undue hardship’ standard when it comes to discharging student loan debt in bankruptcy. Judges generally require borrowers prove that they cannot maintain a “minimal standard of living” while repaying the loans, that their circumstances will not change for a significant amount of time and that they have made “good faith efforts” to repay the loan before filing for bankruptcy.
It is a tough standard to meet and for many it has been a deterrent from filing bankruptcy, since it does not eliminate their most pressing and burdensome debt. A recent study revealed that in only one of about 300 bankruptcy cases where the person had student loan debt did they seek forgiveness.
It is estimated that student loan borrowers in the U.S. owe a total of almost $1.5 trillion in student loan debt. Approximately 40 percent of these individuals will end up defaulting on their loans by the year 2023, according to the Brookings Institute.
The current test for determining whether student loan debt can be wiped away in bankruptcy is the undue hardship test. The standard is very subjective, even Florida bankruptcy courts vary in their determination on what defines undue hardship.
Court’s use what is called the “Brunner Test,” which requires the borrower to show that he or she cannot maintain a basic standard of living while paying back their student loan debt. For example, the borrower has to show that this undue hardship would last throughout the entire repayment period in a Chapter 13, and he or she will need to show that efforts have been made to try to repay federal student loans.
The Department of Education is looking for ways to more clearly define the standard of undue hardship. It is likely they will broaden the definition, which is good news for those struggling with student loan debt. Even though the department cannot change the law, the agency can issue guidance on how "undue hardship" is defined. It also can influence how aggressively its attorneys litigate these claims.
If you have any questions on this topic or are struggling with insurmountable debt, call Orlando bankruptcy attorney, Walter Benenati at 407-777-7777. Ask Walter how you can restart your life. At The Benenati Law Firm, we have helped thousands of individuals and families eliminate their debt and get a fresh start financially. The day you hire our firm, we will contact your creditors to stop the harassment and collection calls. We make our hours convenient for our clients and offer free consultations on Saturdays (9:00 a.m. – 3:00 p.m.) and throughout the week until 5:00 p.m. If you are in a financial crisis and considering filing for bankruptcy, contact an experienced Orlando bankruptcy attorney who can advise you of all of your options.