Herrin Law

How Bankruptcy Impacts Your Student Loans

In general, student loans are nearly impossible to get discharged through a bankruptcy proceeding, and doubly so when the loan is related to the Federal government. What does this mean from a broad picture perspective?

Traditionally Speaking:

Federal loans are strict, which means that when a student loan is defaulted on the government has the option to go after a debtor’s tax refunds, wages, and even social security checks. However, things might be changing, for the better depending on where you stand, allowing debtors more options when it comes to their student loans (specifically loans given or related to the federal government).

For starters, some federal and private loans now enable debtors to lower their payments, sometimes reducing monthly payments to $0 depending on the individual’s income, household size, and monthly expenses. If you’re contemplating bankruptcy already, and you have existing student loans, it’s possible you might qualify for lowering your monthly payments as they relate to your student loans.

In addition, there is bipartisan (both democrats and republicans) support for the “Fresh Start Through Bankruptcy Act” (“FSTBA”) In short, the proposed act would allow some debtors to discharge their federal loans if they are over a decade old. This in itself would be huge for individuals filing for bankruptcy as $1.7 trillion dollars of federal debt are related to student loans. Moreover, bankruptcy courts have traditionally barred any discharge related to student loans leaving a debtor with little to no options.

Also, current legislation is working to set an immediate debt forgiveness program to help stem some of the blowback that’s sure to occur once creditors are allowed to begin taking in monthly payments on student loans in February of 2022; over the last two years, beginning with Covid, student loans were put on hold and borrowers were not required to make any payments nor were they impacted through interest charges on their principal. The current amount sought after would be for $10,000.00 but others are seeking plans with upwards of $50,000.00 in immediate debt forgiveness.

How may this end up impacting you?

If you’re considering bankruptcy and you have student loans that are only adding to the stress of your debt, there may be options!

For starters, some private student loans have been successfully discharged through the bankruptcy courts. Again, these are private loans, but more specifically they relate to creditors bad-faith dealings and in general a debtor would have to show that the loans themselves were being misrepresented, i.e. the private loans were for an education that that the institution knew would not, or could not, help the debtor satisfy.

Beyond looking at private student loans, if you have any, the next step would be to follow the federal government closely. In the coming months, once February 2022 hits, there’s likely to be an influx of debtors struggling with their payments because of Covid and other financial strains that have impacted their financial well-being. As a result, it’s beneficial to see if or when the government plans to initiate their immediate forgiveness programs, or, better yet, determine what timeframe the government anticipates for the FSTBA. If the FSTBA is enacted soon, and your student loans are over 10-years old, then there could be a good chance that your debt will be discharged through a typical bankruptcy proceeding.

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