While a Chapter 7 bankruptcy can, for the most part, wipe out debt effectively, student loans are a well-known exception to this rule. Most Louisville residents may not even think to ask their bankruptcy attorneys about their student loans, and, if they do, the standard advice may be that it is very hard to get student loans discharged. Instead, Kentucky residents may be able to use the bankruptcy process to clear away other debts in order to focus on re-paying the student loans in full.

The reason it is so difficult to discharge student loans debts in a bankruptcy is that a person can only do so if the debt is causing “undue hardship.” The problem, however, is that the term “undue hardship” never got clearly defined in the language of the bankruptcy laws.

Historically, bankruptcy courts have applied a very strict standard which basically requires debtors to show that they are not able to make ends meet unless they get a discharge from student loans. Most debtors find this standard impossible to meet or, at least, too restrictive to make it worth trying to discharge a student loan.

Now, the Department of Education has indicated that it will review its interpretation of “undue hardship” and suggested that it would likely interpret the phrase more liberally than have the country’s bankruptcy courts. This is promising because it could mean that the Department will be less likely to object when a person wants to discharge student loans.

Those who are thinking of filing for bankruptcy, especially if their financial trouble is tied to student loans, should follow this development closely. It could have a significant impact on bankruptcies filed both in Kentucky and throughout the country.

Source: CNBC, “You may soon be able to declare bankruptcy on your student loans-here’s how,” Abigail Hess, March 22, 2018