One of the strictest no-no's in bankruptcy is discharging student loan debt. Only in case-specific situations will the bankruptcy judge consider forgiving the loan, especially if it is under the federal government. However, that may be changing. Let's take a closer look.
Discharging Student Loan Debt
While it's not impossible to discharge student loans in Chapter 7 or Chapter 13 bankruptcy, it's a difficult task that isn't accessible to most people. Debtors need time and legal counsel to have a chance of discharging their loans, and many debtors don't have either one of those things at their disposal.
The first step is filing an adversary proceeding which is essentially a civil lawsuit. It also acts as a formal request to the court for a more in-depth review of the student loan(s) to determine whether it qualifies for discharge.
In most cases, the next step is proving undue hardship. This refers to a situation where paying the debt may put the debtor in a position where they cannot take care of themselves or dependents and may not be able to maintain a standard of living.
Again, it's not impossible to get student loans discharged in bankruptcy, but it's an incredibly complicated process that an experienced legal professional should supervise.
The U.S. Department of Education
Facing creditors is scary enough, but in an adversary proceeding, the person on the other side of the aisle could be the Department of Education. The Department has the power to dispute the discharge and keep the loan as is.
However, the DOE also has a duty of care to borrowers who are in difficult circumstances. Lawmakers and consumer groups have brought up the idea of revising bankruptcy law for years, and now it seems like the Department of Education is finally listening.
It seems unlikely that student loans will be easily dischargeable, but officials are confident that there's some wiggle room with the definition of undue hardship and the burden of debt on the borrower. The traditional stance on undue hardship is that the borrower must be nearly destitute to qualify.
Several cases in recent years have proven that those who can barely pay their loans aren't always better off than those who can't pay them at all. Borrowers who work three or four jobs, push their children to work to contribute, and skimp to the point of starvation are objectively experiencing hardship. They may be able to make the monthly payment, but at what cost?
Legal professionals and officials believe that the most realistic course of action is creating thresholds for bankruptcy discharge. In other words, the DOE could allow the discharge of loans if the borrower earns over half of their total income from disability or if they live far below the poverty line.
The pandemic has left millions of people in a bad financial position, and the push for forgiveness programs and/or discharge through bankruptcy continues to grow. By creating thresholds, the DOE could help many people get the debt relief they deserve.
If you are struggling with student loan debt and looking for legal guidance, contact Buchalter & Pelphrey Attorneys At Law. We have helped many clients pursue discharge, and we can help you too.