Student loan debt has become a massive burden for Americans, and it's only worsening. An estimated 44 million people in the United States carry student loan debt, with an average balance of over $35,000. And the Department of Justice (DOJ) and Department of Education (ED) issued historic new guidance to alleviate this crisis. The new guidance should make it easier for bankruptcy debtors in California to have their student loans discharged when filing for bankruptcy.
What is the new guidance?
The new guidance is meant to relieve student loan debtors struggling to repay their loans. It will allow them to obtain a discharge of their loans more easily in bankruptcy. The guidance is also intended to help lenders and servicers of student loans better understand the process for discharging these loans in bankruptcy.
The new guidance provides that if you cannot make payments on your student loans and are considering bankruptcy for debt relief, you may be able to discharge your loans if you show that repayment would pose an undue hardship.
How can you take advantage of this new guidance?
To qualify for a hardship discharge, you will first file a separate legal action called an adversary proceeding in your bankruptcy case. In the adversary proceeding, you must prove to the court that paying back your student loans would cause undue hardship.
There are three ways to show undue hardship:
If you cannot maintain, based on your current income, minus expenses, a minimal standard of living while also repaying your loans.
If required loan repayments will last more than five years from the date your bankruptcy case is filed.
If, after making a good-faith effort to repay your loans, you cannot pay and do not have a reasonable prospect of ever being able to pay.
It is important to note that courts will look at your entire financial picture when deciding on undue hardship and not just whether you currently have the income to repay your loans. This means that even if you are currently unemployed or underemployed, you may still be able to discharge your student loans if you show that repaying them would cause undue hardship.
Being granted relief
The DOJ's new guidance, in conjunction with the ED, is a step forward for student loan debtors hoping to discharge their loans through bankruptcy. It is important to note each person's situation will be unique, and all of the requirements stated in this guidance must be met to grant debt relief.