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Bankruptcy and student loans: Options for relief

Courts may soon forgive student loan debt in bankruptcy.

The debate over the use of bankruptcy to forgive student loan debt is an ongoing and contentious discourse between the public and lawmakers. In the past, before 1976, bankruptcy was available for the forgiveness of student loan debt. In 1976, Congress changed the law to require repayment for five years before student loans qualified for discharge through bankruptcy.

Congress changed the law again in 1998. This time, lawmakers stated an applicant must establish undue hardship to discharge student loan debt. Courts take various factors into consideration to determine if an applicant’s student loan debt has led to undue hardship. These factors can include a review of whether or not the applicant has made a good faith effort to repay the loan, whether the repayment would result in the applicant living below a minimal standard of living and whether hardship would continue for a signification portion of the loan repayment period. A court’s finding of undue hardship can result in a full or partial discharge of the loan.

Has the undue hardship standard helped those who struggle with student loan debt?

The undue hardship standard has led to relief for few applicants. As a result, the United States Department of Education has stated that it will review the process. The agency notes that the process should not “inadvertently discourage” applicants from filing for relief through bankruptcy. The Department is looking into the process and has asked for public comment on the undue hardship standard and whether or not additional considerations should be taken into account.

Although the move is promising, the law has not yet changed. Those who are struggling to pay off student loan debt still have options. First, as noted above, the applicant could attempt to meet the undue hardship standard. If that is not an option, the applicant could still move forward with a petition for relief through bankruptcy.

Why is bankruptcy helpful even if student loan debt is not discharged?

A successful petition for relief through bankruptcy can result in the discharge of other debt. This could include credit card debt and medical debt. Once these debts are excused, the applicant can focus their financial efforts on the debt that was not forgiven – such as student loan debt.

These are just a few of the options to take into consideration when struggling with financial obligations. An attorney experienced in these matters can review your situation and discuss all possible options for a fresh a start.


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