Department of Education Evaluates Undue Hardship

Student loans are incredibly difficult to discharge in bankruptcy. There was a time when you couldn’t discharge them at all.

Eventually, undue hardship provisions offered a way forward for some borrowers. As Philadelphia bankruptcy attorneys, we’ve been pleased to help a few of our clients escape the difficulties associated with an excess of student loan debt.

According to nationwide statistics, about 40% of borrowers succeed in discharging at least some of their debt through bankruptcy. One of the reasons it is so difficult, however, is that ‘undue hardship’ has never been clearly defined, its interpretation left largely up to the discretion of individual judges.

This issue is now on the radar of federal lawmakers and regulators, and we may see still more protections or allowances for student borrowers as a result.

“The U.S. Department of Education will review whether there is a need to change the way ‘undue hardship’ is evaluated in bankruptcy for student borrowers seeking to erase their loans…a federal law established the ‘undue hardship’ standard without defining it. Bankruptcy courts have made it difficult for student borrowers to prove they qualify.

The Department of Education said in a notice on Tuesday that it wants to ensure student borrowers facing hardship aren’t inadvertently discouraged’ from seeking discharge of their loans.” –The ABA Journal

Signs point to potential bipartisan cooperation on this issue. So watch this space. We’re monitoring all student loan discussions very closely. If a way forward develops for overwhelmed student borrowers we certainly want to be right on top of helping Philadelphia residents (and residents of other areas we service) take advantage of the changes.

If discharge does become easier we won’t be entering some brave new world. Borrowers used to face far fewer hurdles. Prior to 1998 student loans were treated almost like any other debt. They were eligible for discharge through bankruptcy after the seventh year of repayment.

By the way, you shouldn’t feel guilty if you do need to discharge your loans this way. One reason the government is contemplating these changes is it’s costing them more money to try to collect student loan debt from people who will never be able to pay than it costs them to simply let that debt go. Given the economy never quite recovered from the Great Recession of 2008 there are certainly a lot of borrowers out there who are doing the best they can but who simply can’t find the employment that would help them. And plenty more who were bilked by for-profit universities handing out useless degrees and debt alike.

Loosening the grip on bankruptcy restrictions is a win-win for everyone. Let’s hope our lawmakers see it that way.

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