Change could be coming for student loan debt and bankruptcy

Student loans are a debt problem for many. Discover how changes in the bankruptcy laws might help you get rid of this debt sooner.

Bankruptcy can be a lifesaver for someone facing large amounts of debt. It can wipe away debt or create repayment plans that enable a person to avoid collections and repossessions. However, there are certain types of debt that are difficult to discharge through bankruptcy. Student loans are one type of debt that has consistently been excluded from discharge for most bankruptcy filers, despite the fact that the student loan debt amounts to a large portion of the person's total debt. That could all change soon with upcoming modifications to bankruptcy law.

Undue Hardship

Currently, the only way to discharge student loan debt through bankruptcy is to claim undue hardship. Courts have generally considered "undue hardship" to mean that the student loan payments make it difficult to maintain a basic standard of living. To determine undue hardship, the court looks at expenses and considers what a basic standard of living requires financially. If the person can maintain this standard, then he or she is unable to discharge the loans.

Each court can make its own determination on what defines undue hardship, which makes the standard very subjective. This leads to differences from court to court, even within Florida, which can create an unfair situation where some people get to discharge loans while others do not.

A Review

Lawmakers are trying to change the undue hardship definition and ensure it offers clear guidance to judges. The idea is to broaden the definition to enable more people to discharge their student loan debt. According to a recent story by CNBC, the Department of Education is looking into the discharge process for loans in bankruptcy and who is being denied. The Department is conducting this review after considering the number of borrowers who end up defaulting on their student loan obligations. While other options do exist, such as a deferment or income-based repayment plans, the Department is reviewing whether these options are satisfactory if a borrower is facing a large amount of student loan debt.

According to the American Bar Association, the Department will also look into the subjective undue hardship standard and how it is applied differently across the board. While the Department cannot actually change the law, they can make recommendations to lawmakers as to how a clear standard and definition can be set.

Federal Student Loan Debt Forgiveness and Disability

With the recent Tax Cuts and Jobs Act, passed at the end of 2017, borrowers who have had their federal student loans forgiven due to "total and permanent" disability will no longer have to pay federal income taxes on the amount forgiven. This change is great news for borrowers who anticipate having loans forgiven in the future. Disabled borrowers include veterans who are no longer able to work due to service-related injuries but also anyone who is determined to be "totally and permanently disabled" by a physician and is now receiving disability benefits from the Social Security Administration.

If you are struggling with student loan payments, then you may benefit from seeking legal help from an experienced bankruptcy attorney. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover.