Student loans can feel like a dark cloud hanging over one’s head. For many graduates, the weight of monthly payments can be overwhelming, leading to the question: can bankruptcy be a way out? The good news is that it’s possible under limited circumstances, but there are caveats.
Discharging student loans through bankruptcy is a long process, and success is not guaranteed. It can help to explore the details of using bankruptcy to address student loan debt, including the recent changes that may make it a more viable option before committing to this approach.
Proving undue hardship
Traditionally, discharging federal student loans through bankruptcy has been extremely difficult. Borrowers had to prove an “undue hardship,” a legal standard requiring them to demonstrate that repaying the loans would cause them financial misery for a significant portion of their repayment period.
However, in late 2022, the Department of Justice implemented a new process for evaluating undue hardship claims in bankruptcy. This standardized process makes it easier and potentially less expensive for borrowers to seek discharge.
Bankruptcy filing
There are two main types of bankruptcy chapters available for student loan discharge. Chapter 7 eliminates most unsecured debts, including credit cards and medical bills. However, student loans are generally not dischargeable under Chapter 7. Conversely, Chapter 13 involves creating a repayment plan that lasts for 3-5 years. While student loans can’t be entirely erased through Chapter 13, the plan may lower monthly payments and offer some temporary relief.
The key to discharging student loans in bankruptcy, regardless of the chapter filed, is proving undue hardship. The Department of Justice considers various factors in this evaluation, including income, expenses, future earning potential and any disabilities that may limit the ability to work. The new standardized process requires the completion of a form that details a filer’s financial situation.
Bankruptcy can be a path to student loan discharge under specific circumstances. Consulting with a legal team can help individuals determine if this is the right option for their situation and guide them through the complex legal process at hand.
