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.
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.”
The Justice Department will help United States Bankruptcy Courts find cases where federal student loans should be discharged.
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.
Not if you use bankruptcy court. There are no additional court costs once you have filed in U.S. Bankruptcy Court.
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.
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.
The United States Supreme Court states that Bankruptcy is meant to provide "a new opportunity in life, unhampered by the pressure and discouragement of pre-existing debt." It is intended to give people a fresh financial start. It allows them to free themselves of current debt and to start new productive lives unhampered by past financial problems.
Filing bankruptcy cannot cure every financial problem and is not appropriate for every individual. But it may make it possible for financially distressed families to obtain relief from debt.
Individuals can either file Chapter 7 or Chapter 13
A Bankruptcy may end your having to pay much or all of your debt. This is called “discharging” the debt. You are no longer legally obligated to pay debts when they are discharged.
It may stop foreclosure proceedings on a home and allow you to catch up on payments.
It may force a creditor to accept less payment on a secured debt when the creditor has demanded payment in full.
It will immediately stop any garnishment of your wages and debt collection harassment.
It will immediately stop all current legal proceedings about whether you owe money, such as lawsuits.
A Bankruptcy might not allow you to keep things you have that are pledged in a note (such as your home for a house note or car for your car note).
It will not allow you to get out of debts owed to some government agencies, like child support, alimony, most student loans, criminal fines, and most taxes.
It will not protect co-signors when only the person who made the loan files for bankruptcy. Your co-signor still owes the full amount.
It will not end any debts obtained through fraud or intentionally injuring someone.
Under current bankruptcy law, the debtor's "current monthly income" will determine if they can file under Chapter 7 or must file under Chapter 13. This is known as the “means test.” Each state has a table used to decide this. In Louisiana, for a household of 2, the yearly income limit to file a Chapter 7 is $61,042. So, if your gross income is below this amount, you can file a Chapter 7.
But as noted above, how much you own in secured assets and other issues can also make you need a Chapter 13.
If you missed our recent webinar with the Ascension Parish Public Library on "Consumer Rights & Bankruptcy," with SLLS Staff Attorney Jason Stinnett, you can view it below.