Student loan debt and bankruptcy: Are changes on the horizon?

Student loan debt has risen significantly in recent years. Proposals for helping Americans deal with their crushing debt and even canceling some debt are being discussed by people who have entered the 2020 presidential race, like Sen. Elizabeth Warren.

Unfortunately, even though student loan debt can lead to serious financial issues that have people considering bankruptcy, it’s not easy to discharge that kind of debt if they file for Chapter 7 bankruptcy. The American Bankruptcy Institute’s Commission on Consumer Bankruptcy is hoping to change that. In a recent report, it outlines a number of proposed changes to address how student loan debt is handled in bankruptcy. One of the proposals would allow borrowers to discharge their student loan debt seven years after it becomes due.

If the country’s bankruptcy code is changed, it would be the first major update since 2005. In the intervening years, student loan debt has climbed to a total of $1.5 trillion.

It would be up to Congress to accept these proposed changes to the bankruptcy law. Even if it doesn’t, however, it’s possible that bankruptcy judges could use their discretion to interpret the law in a manner that would help student loan borrowers discharge some of the debt in bankruptcy.

Specifically, they could use a loser interpretation of what constitutes “undue hardship.” Currently, just about the only way that borrowers can discharge their student loan debt in bankruptcy is to show that having to pay back their loans in full would cause undue hardship.

It can be frustrating to wait for politicians to take action, and being dependent on how a particular judge interprets the law can cause people to feel helpless. If part of your financial distress is caused by your student loan debt, it’s worth discussing it with an experienced bankruptcy attorney. Even if you can’t discharge that debt, by discharging other debt, you may better able to manage your student loan obligations.