While borrowers have several options for receiving relief from their outstanding debts, student loans can often present difficulties, and a person may worry that they will be required to pay these debts, regardless of their ability to do so. In many cases, student loans cannot be discharged through bankruptcy unless a person is able to show that they have experienced “undue hardship.” However, this may be changing based on the potential passage of a new law, as well as a recent court ruling.

Bill Would Restore the Ability to Discharge Student Loans Through Bankruptcy

Prior to 1998, borrowers were allowed to file for bankruptcy and discharge federal student loans that were at least 10 years old, but following a change in the law, these loans can now only be discharged based on undue hardship. Currently, most people are unable to eliminate student loans that were obtained through government programs or backed by the federal government unless they can prove that repaying these loans would cause extreme financial difficulties that would affect their ability to provide for themselves. Meeting these standards can be difficult, and since few borrowers are able to discharge their student loans, many people are required to repay these debts throughout their entire lifetime.

A bill was recently introduced in the U.S. Senate that would address this issue. The Fresh Start Through Bankruptcy Act would restore the ability to discharge federal student loans after 10 years. If the law passes, borrowers who file for bankruptcy will be able to discharge student loan debts 10 years after the first payment on a loan was due. For loans that have been due for less than 10 years, the existing “undue hardship” standard will remain in effect. 

When most people think of student loan debt, they usually picture someone who has recently graduated from college within the past few years, who, along with that diploma they earned, now owes thousands and thousands of dollars in student loans. Many young adults can be so overwhelmed with student debt, with threats of wage garnishments and other heavy-handed collection tactics, that they are unable to pay their other bills. Quite often, the only option they have to get out from all that debt is to file bankruptcy. Although student loans cannot be discharged in bankruptcy, other debts can, and this may free enough income for them to be able to afford their monthly student loan payments.

But it is not just young adults who are being buried with student loan debt. More and more older people, including the elderly, are struggling with it. It is estimated that approximately seven million Americans over the age of 50 have student loan debt.

Can the Department of Education Seize Social Security Benefits?

Not only can the Department of Education seize tax returns and wages of people who are delinquent in student loans, but they can also withhold money from a person’s Social Security check. Social Security disability checks can also be garnished.

Discharging a student loan requires meeting the difficult condition called undue hardship. Chapter 13 can help through more flexible timing.

Discharging a student loan requires showing undue hardship. The timing of your Chapter 7 filing can determine whether you succeed in this.

We’re in a series on the smart timing of your bankruptcy case. Last week we introduced the special condition you must meet to discharge (write off) student loans: “undue hardship.”

Discharging—permanently writing off—student loans can be difficult. You may be able to make it easier to do with good bankruptcy timing.

Discharging Student Loans in Bankruptcy

It takes certain circumstances to discharge student loans. Those circumstances can involve the right timing of your bankruptcy case.