While a college degree is a valuable asset, obtaining that degree is not usually cheap. Many college students need to take out loans to finance their education. Unfortunately, the costs of a college education have risen significantly in recent years and obtaining a high-paying job upon graduation is not always possible. Therefore, our nation is facing a student debt crisis in which many debtors in Colorado and across the United States are unable to pay back their student loans.
People with other types of debts, such as a mortgage, medical debt or credit card debt have sought financial relief by filing for Chapter 7 or Chapter 13 bankruptcy. In general, it can be difficult (although not impossible) to receive a discharge of student loans through bankruptcy. However, one U.S. congressman has introduced a bill that would change bankruptcy rules in a way that could benefit those with student debt who are unable to pay it back.
Under H.R. 5549, known as the HIGHER ED Act, the definition of “undue hardship” would be expanded. Undue hardship is the standard courts currently utilize to decide whether to approve a discharge of student debt through bankruptcy. As of right now, what constitutes undue hardship has not been codified in federal statutes, meaning courts are tasked with determining what constitutes undue hardship.
Courts have generally used the Brunner test to determine if student loans can be discharged. Under the Brunner test, a debtor must show that they would be unable to keep up a minimal standard of living if they had to pay back their student loans. The Brunner test also considers whether a debtor’s financial issues are short-term or long-term, and whether the debtor attempted to pay back their student loan debt prior to pursuing bankruptcy.
However, even if one’s student loans cannot be discharged, filing for bankruptcy can still be beneficial. By obtaining a bankruptcy discharge on other loans, more income is freed up that debtors can put towards paying back their student loans. This may be true whether a debtor chooses Chapter 7 “liquidation” bankruptcy or whether a debtor chooses Chapter 13 bankruptcy, in which the court will establish a three-to five-year repayment plan.
While it remains to be seen whether H.R. 5549 will become law, those struggling with student loan debt should understand that while it is challenging to discharge student loan debt, it is not altogether impossible. Whether such a discharge is successful or not, debtors may still benefit from filing for bankruptcy.