Student Loan Bankruptcy Discharge[yoast-breadcrumb]
Filing for bankruptcy can provide much-needed relief for those struggling with overwhelming debt. While credit card, medical, and other consumer debts are typically discharged in bankruptcy, student loans are more difficult to dismiss. Unlike other debts, student loans don’t automatically disappear when you file for bankruptcy. You need to take the extra step of filing an “adversary proceeding” lawsuit against the government to prove repaying your student loans would cause “undue hardship”.This is a complex legal process that can be intimidating to navigate alone. Many borrowers want to pursue student loan bankruptcy discharge but don’t know where to start or can’t find an attorney willing to take on their case. However, with persistence and the right strategy, it is possible for some borrowers to find the relief they desperately need.At Delancey Street, we believe everyone deserves a second chance and the opportunity to improve their financial situation. While we can’t guarantee success, we want to empower borrowers with information and support to explore their options. This article provides an overview of the student loan bankruptcy discharge process, recent changes that may improve borrowers’ chances, and tips for navigating the system.
The Undue Hardship Standard
Filing for bankruptcy immediately cancels most types of consumer debt. However, the U.S. Bankruptcy Code treats student loans differently. To qualify for student loan discharge, you must file an adversary proceeding and prove repaying your loans would cause an “undue hardship”.This is a strict legal standard that has been interpreted differently by courts across the country. Most federal circuits use the rigid three-part “Brunner test” established in a 1987 court case. To prove undue hardship under this test, you must show:
- Repaying your loans prevents you from maintaining a minimal standard of living
- Your financial hardship will persist throughout the loan repayment period
- You made a good faith effort to repay the loans before filing for bankruptcy
In the past, borrowers found it nearly impossible to meet this high bar. Income-driven repayment plans allow monthly payments as low as $0 based on disposable income. This made arguing repayment caused undue hardship challenging.However, recent changes in federal guidelines may improve borrowers’ chances of qualifying for discharge.
New Federal Guidelines to Identify Discharge Cases
In November 2022, the U.S. Department of Justice (DOJ) issued new guidance in cooperation with the Department of Education (ED) to help identify appropriate cases for student loan bankruptcy discharge.The goal is to streamline the process, reduce the burden on borrowers, and increase the number of discharges granted. While the legal undue hardship standard remains unchanged, the new guidelines establish clear criteria for when the government will not oppose discharge requests.A key component is a new borrower attestation form. This allows debtors to detail their financial situation for the DOJ and ED to evaluate if discharge is suitable. The 15-page form considers factors like income, expenses, disability status, and good faith repayment efforts.The guidance also provides standards for assessing each aspect of the undue hardship test:
- Minimal standard of living: Evaluation based on debtor’s income, basic living expenses, and financial obligations.
- Persistence: Assessed based on causes of hardship and possibility it may improve.
- Good faith: Objective good faith criteria provided, no evidence of abuse/fraud.
While a positive step forward, the guidance has some limitations. It does not apply to private student loans and is not binding if no settlement is reached before trial. But it should open the door for more borrowers to obtain relief.
Navigating the Student Loan Bankruptcy Discharge Process
Pursuing student loan discharge through bankruptcy is a lengthy legal undertaking. Here is an overview of the steps involved:
- File an adversary proceeding: This initiates a lawsuit within your bankruptcy case. The complaint argues why repaying your student loans imposes an undue hardship.
- Complete the attestation form: Work through the form providing details on income, expenses, disabilities, repayment efforts, and other factors. Be thorough and honest.
- Government review: The DOJ and ED will evaluate your form and determine if your case meets the criteria for discharge under the new guidelines.
- Negotiate a settlement: If the government agrees, they will seek to settle the case and consent to discharge your loans without going to trial.
- Court review: The judge reviews the settlement agreement and makes the final determination to grant discharge.
- Trial: If no settlement is reached, your case will go to trial where the government can oppose discharge. The undue hardship standard still applies.
This is a complex undertaking, but the reward can be life changing. With persistence and the right legal strategy, student loan discharge may be possible.
Tips for Navigating the Student Loan Bankruptcy Process
- Consult an attorney: Find a lawyer experienced with student loan bankruptcy cases. They can advise if you may qualify and guide you through the process.
- Gather documentation: Collect records of income, expenses, loan payments, disability status, and other evidence to support your attestation form.
- Be detailed: Provide as much information as possible on the attestation form to show your situation meets the government’s criteria.
- Try for settlement: With the new guidelines, consenting to discharge is more likely. A settlement prevents the hardship of a trial.
- Consider partial discharge: If the government offers to dismiss part of your debt, weigh the pros and cons of accepting vs. holding out for full discharge.
- Don’t give up: Many attorneys still discourage student loan bankruptcy cases. Keep looking for one willing to take it on. Perseverance and the right strategy can pay off.
A Chance at a Fresh Start
For borrowers trapped under mountains of student debt, bankruptcy discharge represents a chance at a fresh start. While the legal hurdles are high, recent changes tip the scales slightly more in favor of consumers.At Delancey Street, we believe in second chances. Saddling borrowers with debt they have no hope of repaying helps no one. We applaud steps towards a fairer process that provides aid to those who need it most. And we encourage borrowers not to give up hope. With commitment and support, a better financial future may be within reach.