Student loan debt has always been a hot topic, and talk about loan forgiveness has certainly become a divisive issue, especially given recent news events regarding the Biden-Harris Administration’s federal student loan forgiveness plan. Even before that recent big announcement, as Phoenix bankruptcy attorneys, it’s been a common inquiry from clients who come to us for help: “Can a bankruptcy be discharged in bankruptcy?”

While many are quick to believe that student loans can’t be included in a bankruptcy, that’s not actually always the case! We’re going to break down how a bankruptcy can affect student loans, but remember, everyone’s financial situation is unique. Whether you have student loan debt, credit card debt, or other personal debt that’s crushing you, it would be wise to schedule a free consultation with the Wright Law Offices, expert Phoenix bankruptcy attorneys, so we can evaluate your specific circumstances and whether your student loans and other debts can be discharged in a bankruptcy.

The Burden Of Student Loan Debt

Whether you agree with the federal government’s recent student loan debt forgiveness plan or not is irrelevant. As bankruptcy lawyers, we know that any kind of outstanding loan debt can be overwhelming, because we see firsthand the frustration and hopelessness in so many of the clients we are humbled to be able help. The fact of the matter is, the student loan debt statistics don’t lie. Since 1980, the total cost of obtaining a college degree has tripled, whether you opt for a four-year public or four-year private college, and federal support has not kept up. While there are various types of federal student aid such as Pell Grants available for students of working families, the truth is, those haven’t been enough to combat the exorbitant costs of a college education. A Pell Grant once covered nearly 80% of four-year degree, but now only cover a third. College students have had to increasingly rely on private student loans and federal loans to pay for their education, resulting in a genuine student debt crisis in America. Statistics show that the total amount of federal student loan debt stands at $1.75 trillion and rising for more than 48 million student loan borrowers. That’s an estimated average student loan debt of nearly $30,000 per borrower.

It goes without saying that those that struggle the most with their student loan balances are lower- and middle-income borrowers. Qualifying for an income-based repayment plan has been difficult for many, and so the high monthly payments and ballooning balances prevent hard-working Americans from buying homes, starting families, saving for retirement, starting a small business, having any sort of discretionary income, or even just merely making ends meet month to month. A recent analysis by the. U.S.  Department of Education shows that nearly one-third of private or federal student loan borrowers weren’t even able to obtain a degree because the costs of attendance was too high. It’s little wonder that 16% of borrowers are in student loan default, unable to make their monthly payments, with no hope in sight.

What is the Plan for Student Loan Debt Forgiveness?

The Biden-Harris administration’s plan for student loan forgiveness is relatively straightforward. For borrowers with federal loan debt, the U.S. Department of Education will provide up to $20,000 in student loan debt cancellation to Pell Grant recipients, and up to $10,000 in debt cancellation for borrowers who did not receive a Pell Grant. Only borrowers who make less than $125,000 ($250,000 is the maximum income limit for married couples) are eligible for this student debt cancellation. Cancellation does not apply to private loans, and the pause on student loan payments due to the pandemic has been extended one final time through December 31, 2022.

Additionally, the plan seeks to make any outstanding debt for current borrowers and future college students more manageable. The Department of Education is proposing a new income-driven repayment plan that aims to caps monthly payments for undergraduate loans at 5% of a borrower’s discretionary income—half of the rate that borrowers must pay now under most existing plans. Furthermore, the broken Public Service Loan Forgiveness (PSLF) program that’s made it near impossible for borrowers to actually achieve forgiveness despite meeting the requirements is getting an overhaul. Borrowers that have worked in federal, state, tribal, or local government, at a nonprofit or in military service, should now receive appropriate credit toward forgiveness, even for loans in that have been in COVID-19 forbearance.

What Are My Options for My Remaining Outstanding Student Loan Debt?

While The White House’s plan for tackling the federal student loan debt crisis is going to help millions of past and current borrowers, there are many more who need additional help. If you have private student loan debt or a student loan debt balance that greatly exceeds the forgiveness amounts offered, it’s understandable that you may still feel overwhelmed at the thought of tackling your outstanding debt, especially considering that the pandemic deferment period is ending soon. Luckily, there are options available, and one of the best options available to you may be filing for bankruptcy with the assistance of an experienced and trusted bankruptcy attorney.

Yes, Federal Student Loans Can Be Discharged in Bankruptcy! 

It’s a common misconception that federal student loans can’t be included in a bankruptcy, but they certainly can be. While the bar is higher and the process is more burdensome than it is for other types of debt, it is possible. Especially if you have the Wright Law team in your corner.

And actually, the process may soon become easier to include student debt in bankruptcies. Earlier this year, the Department of Education asked the U.S. Department of Justice to request a pause of any active bankruptcy case at a borrower’s discretion. And there have been other promising attempts with the goal of ensuring that bankruptcy relief is available to those burdened by federal student loan debt, and that private student lenders, loan owners, servicers, and debt collectors honor that same relief when a bankruptcy judge discharges debts. So soon, there may not even be as many hoops to jump through to get student loan debt relief.

How Student Loan Bankruptcy Works

Under federal bankruptcy law, student loans are definitely harder to get discharged than other types of unsecured debt, but it is possible. And if your only concern is your student debt, you’ll probably not be able to get it discharged in bankruptcy, but if your credit is shot and you have overwhelming other personal debt, bankruptcy could be the way forward to a brighter financial future.

So, how can you enjoy a student loan debt discharge via bankruptcy? Well, first of all, there is no special type of student loan bankruptcy, as achieving a student loan debt discharge requires filing Chapter 7 or Chapter 13, and then additionally filing an adversary proceeding, or AP. Under U.S. bankruptcy code, an adversary proceeding is basically a lawsuit where you must show the bankruptcy court that repayment would impose undue hardship on you and your dependents.

Bankruptcy courts do not use a uniform set of conditions to determine undue hardship, but many states do use some key factors, known as The Brunner Test, that may help them determine whether you would be eligible for a discharge of your student loans:

  • You would not be able to maintain a minimal standard of living if forced to repay the loan. What constitutes a minimal standard of living? Case law and common sense are a guide – here are a few possibilities:
    • Your income has been below the poverty level for several years and doesn’t show signs of improving.
    • You’re on public assistance or depend on public assistance for your children, or you are dependent on another family member.
    • You have a debilitating illness or permanent injury, or your spouse or child has a total disability or lasting illness.
  • There is evidence that the hardship will continue throughout a significant portion of the loan repayment period.
  • Before filing bankruptcy, you made good faith efforts to repay what you borrowed.

The bankruptcy court will likely scrutinize every expense, and want to see that your situation is very unlikely to improve in any way to allow you to repay your debt. A student loan discharge is not a given victory, but if the bankruptcy court determines repayment would cause undue hardship, your loan could be fully discharged, partially discharged, or you may be required to repay your loan but with more manageable terms, such a lower interest rate.

What About Private Student Loans?

Private student loans can definitely be discharged in a normal bankruptcy proceeding, just like most other unsecured consumer debts, without any additional steps. Eligible private student loans for bankruptcy discharge may include:

  • Loans paid directly to a borrower when the loan amount was higher than the cost of attendance, such as loans for tuition, books, and housing.
  • Loans that paid for education at places that aren’t eligible for Title IV funding, such as schools abroad, unaccredited colleges, unaccredited training, and trade certificate programs.
  • Loans paid to cover living expenses and fees while studying for professional exams, such as the bar exam, or for costs associated with medical or dental residency.
  • Loans to a student attending school less than half-time.

Consult With The Wright Law Offices About Your Student Loan Debt

In a time where Americans are carrying more average debt than previous generations due to rising costs of living, there’s no shame in seeking a fresh financial start for you and your family. Student debt burdens millions of Americans, and while student loan debt relief is on the horizon for many, it may not be enough for you to actually breathe easier and enjoy some disposable income. The Wright Law team is here to help. Our team has offices all over the Valley of the Sun, and we’ve been trusted Phoenix bankruptcy attorneys for well over a decade. Bankruptcy cases are all we take on, allowing us to handle complex bankruptcy cases, and stay current on the latest news and changes in laws related to bankruptcy. We can advise you on whether bankruptcy is your best path toward financial freedom, or we can help you with other forms of debt assistance, such as debt settlement, consolidation, or loan modifications.

If you have questions, call our team at 602-456-6085 or click here for a free consultation. Let us help you discover a fresh start.