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Changes could be coming to student loans and bankruptcy

The student loan debt crisis is having a major effect on college graduates in Tennessee and throughout the nation. Young adults took out tens or even hundreds of thousands of dollars in loans to finance their college education. However, due to a downturn in the economy and stagnant wages, they were unable to find jobs post-graduation that allowed them to pay back their student loans. This, in turn, led many individuals to default on their student loan payments, leading to demanding phone calls from collection agencies threatening to take legal action if the debts are not paid. When a person's finances spiral out-of-control, they may want to file for bankruptcy so that they can have a fresh financial start. Unfortunately, traditionally student loans were ineligible for discharge through bankruptcy. However, the Department of Education may soon change that.

Currently, the only way to have student loan debt discharged through bankruptcy is for the debtor to prove that paying back the loans would place an "undue hardship" on the filer. However, the U.S. Department of Education never gave a specific definition of what an undue hardship was, and neither had case law. Courts turn to the "Brunner Test," in which debtors must show that if they must pay back their student loans over the course of their repayment period, they would be unable to sustain a basic standard of living. They also must show that they have taken steps to try to pay back their federal student loans.

However, now the Department of Education is looking into how they can specifically delineate what an undue hardship is. According to one think tank, it appears that the agency may broaden the definition of undue hardship. If more debtors are able to discharge student loan debt by filing for bankruptcy, not only could it make the bankruptcy process more efficient, but it would also provide a means for debtors to move on with their lives with a clean financial slate.

It remains to be seen if the Department of Education will change the definition of undue hardship for the better. Student loan debt can be absolutely crushing. However, by filing for bankruptcy and having eligible debts discharged, debtors will have more income available to pay back their student loan debts. So those who are struggling with student loan debts may still benefit from filing for bankruptcy.

Source: CNBC, "You may soon be able to declare bankruptcy on your student loans - here's how," Abigail Hess, March 22, 2018

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Mathis, Bates & Klinghard PLLC
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