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An easier time discharging student loan debt in bankruptcy may soon be on the horizon

On Behalf of | Jan 29, 2021 | Bankruptcy

Data compiled by the Federal Reserve Bank of St. Louis shows that student loan debt increased by 107% during the last decade — yet, student loans are frustratingly difficult to eliminate even in bankruptcy.

Things may be looking up for drowning borrowers, however. Many lawmakers are looking to make it easier to discharge student loans in bankruptcy. Trustees are also increasingly permitting over-burdened debtors to eliminate their debt via this debt relief option.

How borrowers prove eligibility to discharge student loan debt via bankruptcy

Trustees have historically found it difficult to determine if borrowers’ debts posed an undue hardship as many lenders offer forbearance, deferment and income-contingent payment options. 

The bankruptcy code currently calls for debtors to pass the “Brunner test” to determine if their student loan debt causes them undue hardship before allowing them to discharge what they owe. That requires borrowers to prove that they previously made payments or negotiated lower monthly installments with their lender before filing bankruptcy. Borrowers must also show that they have a disability that prohibits them from earning enough to cover their student loan payments and maintain a minimal living standard. 

What debt relief options are available to federal student loan borrowers?

There’s been an uptick in trustees discharging bankruptcy filers’ student loan debts recently. Two New Yorkers had $200,000 and $400,000 in respective student loans discharged in bankruptcy in 2020. A federal appeals court ruled that a Colorado couple could discharge $200,000 in private student loans last year as well.

One of President Joseph Biden’s campaign promises had to do with bankruptcy reform and specifically making it easier for students to eliminate their debts through this process. It remains to be seen how this will carry through, but it’s definitely something that is starting to gain traction on Capitol Hill. 

If your student loans and other debts are overwhelming, work with an attorney here in Hixson that isn’t afraid to tackle the student loans as part of your bankruptcy petition. Bankruptcy offers a fresh start that can help many.