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Discharge of student loans in bankruptcy under scrutiny by U.S. DOE

Last month, we blogged about the challenge of getting student loans discharged in bankruptcy. In that post, we talked about the legal standard of “undue hardship” that must be met in New Mexico to have your student loans discharged in bankruptcy.

Undue hardship

Because the federal law does not define “undue hardship,” U.S. bankruptcy courts apply either of two legal standards to define undue hardship, depending on where the court is located. New Mexico is in the 10th Circuit, which applies the Brunner test. To meet that test and have student loans extinguished, the debtor needs to show that the student loan payments would cause a “minimal standard of living” likely to occur during a “significant portion” of the repayment time and that attempts to repay have been made in good faith.

DOE outreach

In a surprising move, the U.S. Department of Education, sometimes called DOE, published on February 21 an official Request for Information on Evaluating Undue Hardship Claims in Adversary Actions Seeking Student Loan Discharge in Bankruptcy Proceedings, which gives the public until May 22, 2018, to submit comments to the agency about issues related to “undue hardship” in this context.

According to Inside Higher Ed, it is unclear what the agency has planned with the request, interpreting it as an interest in “tweaking the standards.” The article cites a former Obama administration official as saying it may be a “signal it wants to broaden the definition” and that the definition should include people truly unable to make their payments over time.

Our firm will continue to monitor this significant development. Anyone with burdensome student loan debt should speak with an attorney about whether the undue hardship standard for discharge may apply to the debtor’s situation.

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