Paying for higher education is no small feat in today’s world. The costs associated with obtaining a bachelor’s degree, which is often insufficient to secure suitable employment, increase every year, and forces most students to acquire high amounts of student loan debt. Once this debt enters the repayment period, many borrowers are quickly overwhelmed by the financial obligation, and need some sort of relief. Bankruptcy is the option individuals traditionally choose to address unsustainable debt, but student loans, both federal and private, are exempt from this relief for the vast majority of debtors. A debtor can claim an undue hardship, which serves as an exception to the limitation on the discharge of student loan debt in bankruptcy, but this standard is extremely difficult to meet.

However, a memo recently issued by the U.S. Department of Education (DOE), the agency in charge of overseeing this industry, may indicate a possible change in the policy governing the discharge of student loan debt. The memo suggests the agency may be willing to reevaluate the undue hardship standard, and adopt a less stringent approach. A discussion of what the DOE communicated in the memo and how this approach would differ from the current test will follow below.

DOE Memo

Student loans are automatically excepted from discharge in Chapter 7 bankruptcy cases. However, if a debtor wants to challenge this exception and request discharge under the claim of undue hardship, he or she must file a motion with the bankruptcy court asking for an evaluation of his or her financial situation in light of the law on this issue. To convince a court an undue hardship exists, the debtor must show the following:

• Repaying the loans, based on current income and expenses, would make it impossible to maintain a minimal standard of living;
• This situation is expected to last for most of the repayment period; and
• He or she has made good faith efforts to repay the loans.

This test is quite stringent, and excludes many student loan borrowers from using bankruptcy to receive financial relief, despite a real inability to meet these obligations. As mentioned, the DOE issued a memo at the end of February seeking comments on how undue hardship is currently analyzed, and specifically asked for input on the following:

• The types of factors used to evaluate undue hardship claims;
• The appropriate weight to give these factors;
• Whether the current test used to evaluate undue hardship creates unfairness for borrowers; and
• How these considerations should weigh on whether a loan holder concedes undue hardship.

Potential Implications of the DOE Memo

While it is hard to know how the DOE may incorporate comments from the public, advocates, and loan servicing companies, the fact that it is willing to consider the impact of the current system on borrowers could be good news. The test for undue hardship does not come from the bankruptcy code or federal regulation, but rather, derives from a legal standard established by the courts. This system makes the outcome of these claims uncertain, as judges may differ in the type of proof necessary, and how such evidence is weighed against the factors described above. Policies issued by the DOE would not necessarily be binding on courts, but would provide some guidance for loan holders, who can concede undue hardship, as well as how borrowers should approach establishing a claim. Obtaining discharge of student loans is difficult, but not impossible, if an experienced bankruptcy attorney is used to fight on a debtor’s behalf.

Speak with a Bankruptcy Attorney

Do not live another day under crushing debt without speaking with a bankruptcy attorney about your options. Chapter 7 bankruptcy could offer you the relief and financial freedom you need to get your life back on track. Christopher L. Arrington, P.C. understands the stress and frustration of your situation and will work to get you the best possible outcome. Contact the Danville law firm to schedule an appointment.