Student loans — both federal and private — have been nearly entirely prohibited from being discharged in bankruptcy for decades. This can effectively prevent those with student loan debt from filing bankruptcy, and if these loans aren’t eligible for discharge or income-based payments, they can pose a heavy obligation for those with other debts or tight budgets. However, a recent letter released by the U.S. Department of Education (DOE) may provide some relief for those who may find themselves unable to ever fully repay their student loans. If you’re considering filing bankruptcy to rid yourself of other debts, but are concerned that you’ll still be required to pay your student loans, you may want to learn how this letter can potentially affect you.
What did the Department of Education change about student loan discharge in bankruptcy?
The DOE recently released a letter intended to clarify the “undue hardship” standard for discharging student loans in bankruptcy. Although for most borrowers it can be nearly impossible to have student loans discharged through bankruptcy, in certain extreme cases where repayment of the loan would cause the borrower undue hardship, this prohibition may be waived. Some examples include severe disability that would prevent the debtor from ever earning enough to repay the loans, or situations in which the student loans were obtained under false pretenses.
The DOE’s letter expanded the definition of “undue hardship” and clarified that the DOE would not fight back against any bankruptcy petition in which the borrower alleged undue hardship if the cost for the DOE to litigate this matter was more than one third of the total amount of student loan debt at issue. This means that if you owe relatively little on your student loans, it may be much easier for you to allege that repayment of the loans would cause you undue hardship, as any attempt by the DOE to show that you have the ability to repay these loans would likely cost thousands of dollars in attorney fees and other costs.
Will this mean you can discharge your student loans by filing bankruptcy?
This letter only sets out guidelines for the DOE — it doesn’t change existing law. And bankruptcy judges are still required to approve the final settlement of your bankruptcy claim, even if the DOE doesn’t oppose the discharge of your student loans in bankruptcy. If the bankruptcy judge feels you’re taking advantage of the bankruptcy process, the facts that make up your claim of undue hardship aren’t compelling enough, or you earn enough to repay the loans on an extended timetable, your claim may be denied, and you may still be unable to discharge your student loans by filing bankruptcy.
However, this letter does provide hope to students who feel they will be unable to ever fully repay their student loans, or whose balances grow faster than payments can be made due to high interest rates. If you’ve done your best to pay down your student loans but have been unsuccessful, or have suffered a debilitating injury that has hampered your earning potential, it may be worthwhile to explore your options with a bankruptcy attorney to determine whether it’s likely you’ll be able to discharge your student loan.
While consulting with a bankruptcy attorney, you may also want to estimate a value of the litigation on your claim. If the estimated cost for the DOE to attack your claim of undue hardship is close to (or higher than) a third of your total student loan balance, you may find it worth your while to allege undue hardship. And if you have more than one student loan and it’s possible that the cost to litigate your claim would be more than a third of one of these loans, you could seek to discharge only this loan and reaffirm the other one.
For more information, visit http://www.wflaw.net.