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Changes to bankruptcy guidelines may help student loan debtors

Many borrowers benefited greatly from recent student loan repayment forbearance instituted in response to the growing public health and financial crisis.

Still, not all good things last forever, and soon borrowers will have to start repaying their student loans. Exactly when depends on when the Supreme Court rules on the Biden administration’s student loan forgiveness plan or this August 1, whichever happens first.

For borrowers who were already in default on their student loans and have no means to get out of default, resuming payments can mean falling deeper into debt.

We know that other types of debts, like credit card debt and medical debt, can be discharged through bankruptcy. Can bankruptcy wipe out student loan debt?

Bankruptcy and student loans

It used to be the case that it was next to impossible to discharge your student loan debt through bankruptcy.

The standard used to determine if your student loan debt should be discharged was whether it would cause you to suffer an undue hardship. Not only was this an extremely high bar to meet, but there was not much consistency amongst all bankruptcy courts on exactly how to interpret it.

The current administration sought to clarify this in November 2022, issuing new guidelines that aim to standardize what constitutes an undue hardship. Courts will now consider:

  • The borrower’s current financial circumstances, and whether per IRS Collection Financial Standards the debtor cannot currently pay back what they owe and keep a minimal standard of living
  • Whether the borrower would be able to repay what they owe in the future should certain circumstances exist
  • Whether the borrower made a good faith effort to pay back what they owed before falling into default and while in default as analyzed using objective criteria

It is hoped that these new guidelines will clarify the definition of undue hardship, leading to more consistency in student loan bankruptcy discharges across the nation.

So, if you are worried about your student loan delinquencies coming back to haunt you soon, remember that filing for Chapter 7 or Chapter 13 bankruptcy is still a viable option for dealing with unmanageable debt.

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