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Department of Education's Newly Released Guidance on Student Loans and Bankruptcy

Posted on in Bankruptcy Attorney

Department of Education's Newly Released Guidance on Student Loans and Bankruptcy

The Department of Education has released new guidance on how creditors may handle bankruptcy discharge requests for government-funded student loan debt. This guidance seeks to balance collecting student loan debts versus allowing the debts to be discharged. Through this guidance, the Department of Education advises guaranty agencies to be more careful when considering under what circumstances they will challenge borrowers in court who are claiming undue hardship in order to have his or her debt discharged. The exception for collecting loans is where paying such loans would pose an undue burden on the debtor. In its recently released letter, the Department of Education says it would consent to and/or not oppose undue hardship discharge of student loans where repaying the loan would impose an undue hardship on the debtor.

How to Determine Whether to Challenge a Debtor's Undue Hardship Discharge Request

The Department of Education has determined a formula to calculate when it is not advantageous of the government to oppose a student loan discharge request:
If the cost to pursue the matter in bankruptcy court as estimated to exceed one-third of the total amount owed on the loan, the holder may accept and/or not oppose any undue hardship claim by the borrower in adversarial proceedings.

The total amount owed on the loan includes:

  • Current principal balance
  • Unpaid accrued interest
  • Current, unpaid accrued collection costs

What to Consider When Determining Undue Hardship

Undue hardship is a higher standard of difficulty than other types of consumer dead like credit cards and mortgages. Democrats in Congress have advocated for easing the requirements for student loan debt discharge and the Obama Administration has similarly indicated that it may support such a change. Factors considered in determining what constitutes an undue hardship include:

  • Whether the debtor has filed for bankruptcy due to factors beyond their control that affect his or her ability to repay the student loan debt
  • Whether the debtor has been diagnosed with a mental or physical impairment
  • Whether the debtor is a veteran who has been deemed unemployable due to a service-connected disability by the Department of Veteran Affairs
  • Whether the debtor's health has materially changed since the debt incurred
  • Whether there has been a significant time lapse since the debt incurred
  • Whether the debtor's expenses are reasonable

Are You Facing Bankruptcy as a Result of Your Student Loan Debt?

Debts incurred from student loans are often high in amount and can take prolonged periods of time to get paid off. If you are contemplating filing for federal bankruptcy due to the student loan debt you are facing, it is urgent that you seek legal assistance in assessing your financial situation. Filing for bankruptcy can create extreme financial strife especially if you are dealing with other personal issues that have negatively impacted your ability to pay off your student loan debt in a timely manner. At the Law Offices of Newland & Newland, LLP, we have a team of experienced lawyers who possess the skills and expertise needed to guide you through your financial difficulties. Contact our office today to schedule your consultation.

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