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New rules can help people cancel federal student loans in bankruptcy. The law calls this getting a debt “discharged.” The U.S. Department of Justice and the U.S. Department of Education will help with the new rules. This applies to bankruptcy cases filed after November 17, 2022. Bankruptcy is complicated. Get a lawyer to help you if you can. You may qualify for free legal help from Southeast Louisiana Legal Services.

What is the law about using bankruptcy to discharge federal student loans?

The law makes it hard to discharge federal student loans in bankruptcy court. A person must prove that repaying the loans creates “undue hardship.” It is hard to prove “undue hardship.”

This is what it takes to prove “undue hardship” in a bankruptcy case:

• You can’t pay back your federal student loans and have a basic standard of living.
• Your financial hardship will last most of the loan repayment period.
• You made good-faith efforts to repay the loan before filing for bankruptcy.

How will the new rules make it easier to discharge federal student loans?

The Justice Department will help United States Bankruptcy Courts find cases where federal student loans should be discharged.

How do I use bankruptcy to discharge federal student loans?

There are multiple kinds of bankruptcy cases. You must file for bankruptcy under Chapter 7 or Chapter 13. For more about bankruptcy, see our other post on “Bankruptcy Basics.”

Find a lawyer to help you if you don’t know if you should file for bankruptcy or what kind of bankruptcy case to file. It is always best to have a lawyer if you can.

In the bankruptcy case, you or your attorney have to file for an “Adversary Proceeding” to have the bankruptcy court consider canceling your federal student loan.

The Justice Department will ask the person filing for bankruptcy (the “debtor”) to complete a form. Your answers will help the Justice Department review your federal student loan discharge claim.

The form will ask about the money situation for you and your household. Most of your income and expense information is probably already in the bankruptcy court papers.

The Justice Department and the Department of Education will review your federal student loan claims and money situation and use the “undue hardship” test mentioned above.

The government will decide whether to ask the court to discharge your student loans. Even if your situation does not seem to meet the test, the government can still ask the court to discharge the loans.

What will the government look at?

1. Your Ability to Pay Now
   • The government will see if your expenses are the same or more than your income and if this means you cannot pay back your loans now.
2. Your Ability to Pay in the Future
   • The government will see if you can pay back your loans in the future. Here are some things that could show you cannot repay your loans in the future:
     • You are 65 or older.
     • You have a disability or ongoing injury that affects your income.
     • You were unemployed for at least 5 of the last ten years.
     • You did not get the degree for which you took out the loans; and
     • The loan has not been held from payment by an “in-school” payment status for at least the last ten years.
     • You can use other facts to show that you cannot repay the loans.
3. Your Good Faith Efforts to Repay
   • You must show good faith about repaying the loan or loans. You will need to show at least one of the following things to prove good faith:
     • That you made a payment.
     • You applied for deferment or forbearance (not in school or grace period ones);
     • You applied for an IDRP (Income Driven Repayment Plan);
     • You applied for a federal consolidation loan.
     • You responded to outreach from a loan servicer or collector;
     • You cooperated with the Department of Education or its servicer on repayment options, forbearance, deferment, or loan consolidation options; or
     • You cooperated with a third party you believed would help you to manage your student loan debt.

Are there additional court costs to get federal student loans discharged?

Not if you use bankruptcy court. There are no additional court costs once you have filed in U.S. Bankruptcy Court.

What loans do the new rules cover?

The new rules cover Direct Loans and other loans held by the U.S. Department of Education.

So far, the new rules do not apply to Federal Family Education Loans (FFEL) held by guarantors or to Perkins Loans still held by the school.

The new rules do NOT apply to any private student loans.

What can I do with my FFEL and Perkins loans?

Pay attention to the news. The Department of Education may change rules for FFEL and Perkins loans. Or you can get an attorney to help you review your student loans and determine if a Chapter 7 bankruptcy is right for you.

Here are other resources:

https://www.justice.gov/opa/pr/justice-department-and-department-education-announce-fairer-and-more-accessible-bankruptcy