Dealing with Student Loans in Bankruptcy

Student loans are ubiquitous these days. Students all over Sacramento, from Sac State to American River College, often graduate and find themselves unequipped to handle the debt burden imposed by student loans. It is a fairly common understanding that bankruptcy isn’t much help when it comes to student loans. But earlier this month, the United States Department of Education has issued some new guidelines that may give some glimmer of hope to those seeking discharge of student loan debt in bankruptcy.

The basic rule is that student loan debt can be discharged if the debtor is able to prove that repaying the loan would impose an undue hardship on the debtor. In the past, the Department of Education has vigorously opposed any consumer attempts to discharge their federal student loan debt even when there is a clear undue hardship. In practical terms, it has been very difficult to get a discharge for student loans.

But the new guidelines show that the Department of Education has a formula to determine when it is not advantageous for the government to oppose the discharge request. Specifically, the guidelines say, “If a holder determines that requiring repayment would not impose an undue hardship, the holder must then evaluate the cost of undue hardship litigation. If the costs to pursue the matter in bankruptcy court are estimated to exceed one-third of the total amount owed on the loan (including the principal balance, any unpaid accrued interest, and current, unpaid accrued collection costs), the holder may accept and/or not oppose an undue hardship claim by the borrower in an adversary proceeding.”

The guidelines also offered a number of factors and considerations as points to consider by lenders in a discharge situation. The following are some of these factors:

– Whether a debtor’s health has materially changed since the student loan debt was incurred.
– Whether significant time has elapsed since the debt was incurred.
– Veterans who are unemployable due to a service-connected disability (as determined by the Department of Veterans Affairs).
– Whether the debtor’s expenses are reasonable and show that she minimizes unnecessary expenses.
– Whether the debtor is approaching retirement.
– Whether a debtor has filed for bankruptcy due to factors beyond his or her control, such as a divorce resulting in the diminution of family income, which will not realistically be reestablished.

Basically, if a consumer debtor and her attorney put together a reasonable and well-documented case that the student loan debt will create an undue hardship based on the considerations provided, then the lender should not oppose the discharge. While this isn’t a cure-all for all student loan debtors, it is a sign that things are changing. These guidelines could very well make it easier for those who are being crushed by the overwhelming burden of student loans to get a discharge. Time will tell if the lenders choose to follow these guidelines. The important thing to take away is that, if a debtor seeks the advice of an experienced bankruptcy attorney, she will have a better chance of success when fighting for a student loan discharge.