Here's a breakdown of the latest developments regarding filing student loan debts in bankruptcy:
Historically Difficult, Now Easier
- Undue Hardship Standard: It's been notoriously difficult to discharge student loans in bankruptcy. You must prove to the court that repaying the loans would cause "undue hardship" on you and your dependents. This has been a high bar to meet.
- Changes to Student Loan Discharge: In November 2022, the Departments of Justice and Education introduced changes that had been under consideration under both the Biden and Trump administrations to the process aiming to make it easier for borrowers to potentially discharge federal student loan debt in bankruptcy.
- New Streamlined Path: The process now includes a form borrowers can use to certify their financial situation. The Department of Justice can potentially agree to a discharge recommendation without extensive court proceedings. The final decision still rests with a bankruptcy judge.
Key Points to Understand
- Success Not Guaranteed: While the process has been simplified somewhat, successfully discharging student loans in bankruptcy remains challenging.
- Undue Hardship Requirement Remains: You'll still need strong evidence that repayment imposes an undue hardship on your life in order to succeed.
- Adversary Proceeding: Discharging student loans in bankruptcy requires a separate legal filing within your bankruptcy case called an adversary proceeding.
- Private Loans: The streamlined process does not apply to private loans. Their dischargeability depends on the specific loan terms.
What Does This Mean?
- More Borrowers Are Trying: Increased awareness of these legal changes has led to more borrowers attempting to discharge their student loans through bankruptcy.
- Early Successes: The first year since the process was changed has seen a significant number of cases with full or partial discharges granted.
Important Considerations
- It's Not Automatic: Bankruptcy doesn't erase all debts. Student loans might not be automatically discharged even if other debts are.
- Impact on Credit: Filing bankruptcy itself will negatively impact your credit score.
- Professional Advice is Crucial: If you're struggling with overwhelming student loan debt, consider consulting with both a student loan specialist and an experienced bankruptcy attorney to fully explore your options.
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