Student Loan Repayment and Bankruptcy
With student loan forgiveness coming to an end in October of 2023, the borrowers need to be aware of their options.
Most debts are dischargeable in a Chapter 7 bankruptcy proceeding. Both private and federal student loans may be dischargeable, but both require an elevated showing in Court.
“...must file a bankruptcy case first, followed by a separate lawsuit within the bankruptcy called an “adversary proceeding.” The adversary proceeding is meant to show that student loans have created an “undue hardship” for the debtor, and that there is no way they could ever pay the debt off.”
The factors used in proving the undue hardship requirement often prove too difficult for the average debtor—and that is precisely why these debts should be treated differently by bankruptcy petitioners.
When the student loan forgiveness program likely ends in one month, many debtors will choose to continue not to pay. Yet this is risky given that the debt may be with the borrower for many years.
The current U.S. student debt problem grew over time to an unmanageable ball of fishing wire thanks to several factors. The government backstopped and subsidized these loans, and universities capitalized on the increased demand to attend college. Little thought is often given to how the borrower will repay the six-figure debt with nagging repayment rates.
However, the overall imbalances in the system are not an excuse at the present time in the eyes of the Court, and debtors will be treated as ordinary borrowers. The avenue for undue hardship showings remains a tool, however, and your counsel can try to make such a showing.
It remains to be seen whether borrowers can restructure the debts. Such instances may be sporadic and hard to predict.
As for the proceedings themselves, the Government has attempted to clarify the standards. I have not yet reviewed the attestation form the government requires, but you should always seek counsel before completing such a form.
As always, nothing in this article shall be considered legal advice and no attorney-client relationship is assumed or formed by virtue of any opinions contained here.
