The American Bankruptcy Institute has proposed new rules, and while these rules don’t require Congress to change bankruptcy laws, they may nevertheless provide relief for borrowers. That is because the report includes advice to bankruptcy judges who might want to be more lenient with student loan borrowers, but whom have lacked the precedent and case law to do so.
The report does this by offering suggestions and guidelines for how judges could reinterpret the “undue hardship” standard. Instead of evaluating whether the borrower could possibly repay his or her loans over the course of a lifetime while maintaining a minimal standard of living, the new guidelines suggest assessing whether the borrower could possibly pay the loan back on the original loan terms without falling into poverty.
These are very different standards, and are likely to make a large difference for borrowers if judges adopt them on a wide scale.
One of the reasons the ABI has made these recommendations is a recognition of all the ways forcing borrowers to labor under the shadow of student loans for a lifetime is harming our economy.
Even the IRS is aware of the costs, leading them to start floating solutions of their own, like allowing employers to match 401K contributions by matching student loan repayments instead of 401K deposits, allowing the borrower to save for retirement and repay loans at the same time.
“Debt hanging over the debtor forever has a cost,” Elizabeth Perris, a retired bankruptcy judge who co-chaired the commission report, said Thursday. “It’s a cost in terms of lack of purchase of houses, cars, and having children, and we just recognize that at a certain point for those people who want to avail themselves of bankruptcy, they ought to be able to get a fresh start and move on with their lives.” –Market Watch
Local judges are likely to be very sympathetic to making use of these changes. Last year, Philadelphia-based US Bankruptcy Judge Eric Frank made news by canceling a single mom’s $30,000 bankruptcy debt. While it’s impossible to predict whether Frank or others like him will respond to this increased leeway for sure, it does seem like a positive indication.
Of course, the biggest reform suggested by the ABI report would be a return to 1976 standards which allowed student loans to be discharged in bankruptcy like any other debt.
See also: In the News: Navient Student Loan Lawsuit.
What does all this mean for you, the borrower?
It means you don’t necessarily have to wait for the laws to change. There’s never been a better time to make the attempt to discharge your student loans in bankruptcy even while Congress continues to drag its feet. The Department of Education has also been reviewing the definition of undue hardship, and the ABI report urges it to reduce the number of challenges it issues to borrowers seeking to discharge loans in bankruptcy.
Think you might be a good candidate for discharging your student loans in bankruptcy? Not sure? Contact us today to schedule your free consultation.