For many years, bankruptcy wasn’t a realistic option for federal student loan borrowers. Strict rules and legal standards meant a successful bankruptcy discharge of federal student loans was nearly impossible.
Finding an attorney was a considerable challenge, even if a borrower was willing to take a longshot case to court. Most bankruptcy attorneys wouldn’t even take the case due to the many complications of discharging student loans.
New guidance issued by the Department of Justice aims to fix these issues.
A Note from the Sherpa for Attorneys: This article is written for borrowers to explain the new procedure for a bankruptcy discharge.
If you have a specific question about the new DOJ guidelines, feel free to contact me to discuss them in more detail.
Changes to the Rules for Federal Loans in Bankruptcy
To successfully discharge federal student loans in bankruptcy, borrowers had to show that the loans caused an “undue hardship.” Bankruptcy courts have interpreted the under hardship very strictly over the years.
For federal borrowers, showing an undue hardship has proven to be especially difficult because of the availability of Income-Driven Repayment plans and student loan forgiveness. Attorneys for the Department of Justice routinely argued that the federal debt was manageable due to these programs. This argument made it hard for borrowers and their attorneys to show undue hardship.
The big change is how Department of Justice attorneys will be handling these cases. Under the new guidelines, DOJ attorneys are supposed to use the standard repayment plan in their analysis. This change will make it much easier for borrowers to demonstrate a hardship.
Best of all, the new standards now encourage the DOJ attorneys to stipulate to a bankruptcy discharge when appropriate. This means that many borrowers won’t have to go through a trial to show that they should get their loans discharged.
To put things simply, bankruptcy used to be nearly impossible for most student loan borrowers. Today, we have a new express lane to make bankruptcy a realistic option for overwhelmed borrowers.
Finding an Attorney
The streamlined rules will make it much easier for most bankruptcy attorneys to help federal borrowers.
In the past, handling student loans in a bankruptcy often required student loan specialists. With the new rules, many more bankruptcy attorneys will be empowered to help their clients with student loans.
These changes have been a significant development for the bankruptcy attorney community, and finding an attorney to take on your case should be very easy.
Are You Struggling to Find an Attorney? If you can’t find an attorney willing to help with your student loans, please send me an email.
I can’t endorse or recommend anyone, but I can usually help you find someone in your area willing to handle a student loan discharge case.
When does bankruptcy make sense?
The new Department of Justice standards make it significantly easier to discharge student loans, but not all borrowers will qualify.
There isn’t a simple way to say who will qualify and who won’t.
Instead, I’ll say this: not everyone is a good candidate for bankruptcy. If you just graduated college and have a good job, discharging your federal loans probably won’t work. However, if you are genuinely struggling to get by financially and repaying your student loans in full seems unlikely, bankruptcy may now offer a fresh start.
A Small Request
I usually don’t ask anything of my readers. I’m here to help you, not the other way around.
However, these new bankruptcy rules are uncharted territory for everyone.
If you have the time, I’d appreciate two things:
- If you see someone on social media or an internet discussion reference how bankruptcy is impossible, please consider pointing out that there are new rules and things are changing. If people mistakenly think that student loans can’t get discharged, they could miss out on critical help.
- If you decide to pursue bankruptcy to address your student loans, please let me know how it goes. The more I know about the new process, the better the guidance on this site becomes.