Due to the nationwide health and economic crisis that began in 2020, the current administration suspended student loan payments for borrowers already overburdened by medical debt, job loss, inflation and other financial difficulties.
While the suspension allowed many to recover somewhat financially, the suspension is set to end this year under one of two scenarios.
Borrowers will be expected to resume payments either when the U.S. Supreme Court issues a decision on the current administration’s student loan forgiveness plan or by August 2023, a date set by the current administration, whichever happens first.
Still, this may not be enough to help those who were previously in default on their student loans and will continue to be in default once the repayment suspension is over. And if these borrowers are also carrying significant debts such as credit card debt or medical debt, paying back their student loans is simply impossible.
This is a terrible situation, but there is hope. For some, filing for bankruptcy may be the best way out of a bad situation.
Bankruptcy: an option to erase student loans?
There is a common myth that student loans can never be erased or “discharged” through bankruptcy. This is not entirely true.
If you want to discharge your student loan through bankruptcy, you must file for and attend an adversary proceeding in addition to filing for Chapter 7 or Chapter 13 bankruptcy. However, adversary proceedings can be complicated and time consuming, even for professionals, often leading to significant expenses for the debtor.
Moreover, many adversary proceedings are not successful. The bar for discharging student loans, as currently set by Congress, is high. You must show you will suffer an “undue hardship” if forced to pay back your student loans.
While there are some guidelines as to what constitutes an undue hardship, it is a gray area and different judges will interpret it in different ways. This makes proving you will suffer an undue hardship difficult.
However, the current administration has announced a new process for the undue hardship analysis. Bankruptcy courts, instead of using their own discretion, will examine:
- Your present ability to pay your student loans based on your expenses vs. your income
- Your future ability to pay based on an assessment of whether your financial circumstances are likely to change based on certain factors
- Your good faith efforts to earn an income, manage your expenses and repay your student loans. Non-payment of student loans will not automatically disqualify you from discharge if other good faith factors are present
If when student loan repayments continue, you are struggling to meet all of your financial obligations, filing for bankruptcy may be a worthwhile option to consider.
You should not be embarrassed about filing for bankruptcy. It is a viable and responsible way for settling debts you cannot pay back, providing you with the means to move forward with your life in a fiscally responsible way.