Education Department considers bankruptcy for student loans

On behalf of Bill Maddox

The U.S. Department of Education is considering making it easier to discharge student debt in bankruptcy.

Student loans are notoriously difficult to discharge in bankruptcy. While it is not quite true that student debt is completely impossible to declare bankruptcy on, the hurdles that people face in order to do so are extremely high. Thankfully, according to CNBC, things could soon change for the better for student loan borrowers with the U.S. Department of Education considering making bankruptcy an easier option for those who have defaulted on their student debt.

Exacerbating the student debt crisis

While the financial crisis of 2008 is in the past for most Americans, for those with student debt it can feel as though the crisis never ended. That’s because Americans owe a collective $1.5 trillion in student debt and many of them are struggling to pay it back. In fact, 40 percent of borrowers are expected to default on their student loans within the next five years.

Such borrowers have a hard time qualifying for a mortgage, getting a car loan, or starting a business. Because such loans typically cannot be discharged in bankruptcy, that leaves many such borrowers feeling as though they are stuck in a seemingly endless pit of debt. Even the new chairman of the Federal Reserve has warned that student debt could be holding back America’s economy. He recently noted that the fact that student debt is the only type of debt that cannot be discharged through bankruptcy makes little economic sense.

Clarifying bankruptcy rules

Technically, student debt can be discharged through bankruptcy, but to do that borrowers must show that they face “undue hardship.” Congress has never defined what, exactly, counts as undue hardship and courts have failed to come up with a consistent definition. Most courts use what is called the “Brunner Test,” which sets a very high bar requiring borrowers to prove that they currently cannot maintain a basic standard of living, would not be able to maintain a basic standard of living for much of their repayment period, and that they have tried to pay back their loans. In effect, only borrowers facing extreme circumstances, such as a physical disability that prevents them from working, are able to pass the thresholds of the Brunner Test.

However, relief may be in sight for more borrowers. The Department of Education has said that it is looking at more explicitly defining undue hardship. While the Education Department has not released details of what that definition will be, it has indicated it will opt for a clearer and broader understanding of undue hardship. That would make bankruptcy a more realistic option for many struggling student loan borrowers.

Bankruptcy law

For those who are struggling with debt, including student debt, it may be time to talk to a bankruptcy attorney. Even if certain debt cannot be discharged through bankruptcy, other types of debt can, which could provide the financial relief that borrowers need. Furthermore, an attorney can advise clients on any alternatives to bankruptcy that may be available to them.