Recently the Department of Education and the Department of Justice have issued new regulations concerning their treatment of student loans in a bankruptcy case and the procedure to discharge those loans. These regulations appear to significantly loosen up the rules regarding discharging student loans in bankruptcy.
Until now student loans have been practically impossible to discharge in a bankruptcy case. With these new rules, the possibility of discharging some student loans has increased significantly.
These rules apply only to federal student loans. They do not apply to private loans, often called FFEL loans, or state-sponsored loans or loans directly from the school or institution itself.
The dischargeability of the loans depends primarily on a debtor’s ability to repay the loans given income, deductions and normal necessary family living expenses. The debtor must prove that he or she does not have the capacity to repay the loans by making regular monthly payment over a ten (10) year period of time.
It must also be shown that good faith attempts to make payments on these loans has been tried in the past and that the current inability to repay on the loans will extend into the indefinite future.
The current regulations require that we file a complaint or application in the bankruptcy case requesting a discharge of those student loans and provide all of the requested financial information to the Department of Justice who, with the Department of Education, will make their own analysis and determine if they will stipulate that, given the circumstances in that particular case, the federal student loans owing should be discharged.
These are very new rules and a new procedure and it is uncertain at this time how successful some of these applications will be, but there is at least some hope that federal student loans may be allowed to be discharged in certain bankruptcy cases. If you choose to file bankruptcy to discharge other debts, we can make an analysis as to whether you may qualify for the discharge of your federal student loans.
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