You Can Now Discharge Student Loans Through Bankruptcy

You took out student loans to pay for an education that would afford you a better life. Despite your degree, You barely have enough money to pay your bills and your student loans. Sound familiar?

A new government process makes it possible for some individuals to get rid of student loans through bankruptcy. In fact, your likelihood of discharge might be higher than you think. The Department of Education shows that since the changes, 99 percent of student loan cases have seen full or partial federal loan discharge.

Let’s dive in to see if you qualify.

 

Understanding Student Loans and Bankruptcy 

A study by the National Center for Education Statistics revealed that higher education costs surged 180 percent since 1980. That’s after accounting for inflation. This steep increase has outpaced the earning power of many former students, trapping them in a cycle of debt.

Bankruptcy, often considered a last resort, can help break that cycle. However, dischargeable debt typically excluded student loans. Section 523 (a) (8) of the Bankruptcy Code permits discharge only when repayment poses an ‘undue hardship’ on the debtor and their dependents. That legal standard has proven to be too stringent over the past few decades. Undue hardship is poorly defined, varies across jurisdictions, and nearly impossible for debtors to meet.

The Rights of Lenders and Borrowers 

The ‘undue hardship’ provision in the Bankruptcy Code was meant to stop borrowers from exploiting bankruptcy post-graduation. It protects lenders’ interests. Yet, those in good faith should not fall deeper into debt while supporting themselves and their families.

Despite lenders’ interests often prevailing in court, student loans still drive nearly a third of Chapter 7 bankruptcies, representing 49% of filers’ total debt. This suggests many Americans are eliminating other debts just to manage their student loan payments.

Over time, this does more than just hold down millions of individuals and their families. It’s a persistent drag on the national economy. Consequently, reducing the amount of student loan debt has been a focal point for the Biden administration.

Why This is Good News for Borrowers 

The federal government has simplified the bankruptcy process for student loan borrowers. This is a far cry from encouraging debtors to default. After all, bankruptcy still is a step nobody should take lightly. You could forfeit assets, temporarily damage your credit rating, and even lose the ability to apply for certain jobs.

But now, bankruptcy can offer a truly fresh start, one that includes freedom from student loan debt. A fairer, more streamlined approach provides more balance between the interests of lenders and borrowers who’ve struggled to repay.

Let’s look at the new process.

Navigating Student Loan Discharge Through Bankruptcy 

The Department of Education focused on three objectives when it developed the student loan discharge guide:

1. Clarify the discharge rules for everyone, regardless of legal representation.
2. Simplify the process to demonstrate the need for loan cancellation through forms like the “Attestation,” and
3. Improve the likelihood of government support for discharge when justified.

To meet those objectives, the Department outlined certain criteria a debtor must meet. The new guidelines took effect in November of 2022.

Criteria for Student Loan Discharge

To determine if your loan can be canceled, the Department of Education assesses your total financial situation. Here’s what it takes into account:

• Present Ability to Pay: Would continuing to pay on your student loans prevent you from maintaining a minimum standard of living?  The Department of Education compares your costs to your income to see what — or if — you can afford to pay.
• Future Ability to Pay: Is your financial predicament unlikely to change during the repayment period? Factors such as retirement, disability, and employment history can indicate that your finances won’t substantially improve.
• Good Faith Efforts: Have you made honest and reasonable efforts to keep from defaulting on your loan? Have you made payments? Have you applied for extensions or forbearance, or tried an income-dependent repayment plan? These are positive indicators, however, there are also other ways to show engagement and good faith.

Discharge Likelihood 

Guidance also considers your assets and the possibility of partially canceling your loan. There’s a form — an Attestation — included to help gather this information. Department of Justice attorneys refer to this form when consulting with the Education Department. I’ll go into more detail about the Attestation form later.

Filing for Student Loan Discharge Through Bankruptcy

Bankruptcy is a process. It can take a few months or a few years, depending on the type of bankruptcy you file. If you’ve never filed before, here is how to initiate proceedings:

1. Get Legal Help: Hire an experienced bankruptcy attorney.
2. Choose Your Bankruptcy Type: Decide between Chapter 7, which erases unsecured debts, and Chapter 13, which arranges debt repayment over time. Chapter 7 requires means testing, but it’s a simpler and quicker process. Chapter 13 restructures your debts and gives you more time to pay them off before discharge. I have written about both types of bankruptcy, if you want to learn more.
3. File an Adversary Proceeding: This is a separate lawsuit filed within your bankruptcy case. This lets your lenders know that you are “suing” to have your student loans discharged. It also details your criteria for discharge consideration.
4. Complete the Attestation Form: With assistance from your lawyer, you must complete this form that details your entire financial situation, including your:

• •  total household income,
  • total expenses (house payments, rent, car loans, insurance, bills, monthly groceries, etc.)
  • loan repayment history, and
  • other relevant disclosures.

The Department of Justice (DOJ) will review your Attestation. Next, it will stipulate those facts and make its recommendation to the bankruptcy court. The court will either discharge all or part of your loans, or determine you do not meet criteria for cancelation.

The Benefit of Attestation 

The Attestation simplifies the process, eliminating the need for costly lawsuits previously necessary for student loan discharge. This saves debtors time and money as they seek to make their financial burden more manageable. It also makes the work easier for DOJ attorneys who no longer must bother with time-consuming investigations.

Which Student Loans Qualify for Discharge?

Only government-held student loans can be considered for discharge under the new guidelines. Most privately-held student loans are still considered secured debt. This means they can be discharged by the same ‘undue hardship’ criteria: Inability to pay now, or in the future, but with some evidence of good faith. However, the process may be considerably more difficult.

The Role of a Bankruptcy Attorney in Student Loan Discharge Cases

Just because new guidelines have simplified this process does not mean it’s simple. Bankruptcy is a fairly complex undertaking, and can require a blizzard of tedious paperwork.

A good bankruptcy lawyer significantly eases the process. Here are some key ways:

• Guidance Through Bankruptcy: Your attorney provides a clear explanation of the bankruptcy process and what you should expect. He or she is also there to give encouragement and emotional support during a stressful time.
• Document Preparation and Filing: Lawyers provide great assistance in completing and submitting required documents. These include the paperwork for the separate adversary proceeding, and the all-important Attestation form.
• Court Representation: In court proceedings, your bankruptcy lawyer advocates for your interests. This is especially helpful if your discharge request faces appeals or objections.
• Creditor Negotiation: Chances are, your bankruptcy filing will involve more than just your student loan debt. Your attorney can negotiate with all your creditors to eliminate your debts or agree on a feasible repayment plan.

Could You Use a Fresh Start? 

Opting for bankruptcy is a tough decision. It’s nothing less than a hard restart on your finances. Our legal team can help you weigh the pros and cons of your situation and potential solutions. We can help you take full advantage of the clean slate that bankruptcy offers. Call 303-688-0944 today for a case review.