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Student debtors may get relief

A Chapter 7 bankruptcy does not provide debt relief for college loans unless the debtor can meet the strict requirements for showing an undue burden. But, a bill introduced in the U.S. House of Representatives could broaden the definition of undue burden and increase eligibility for discharging student loan debt.

The bill's sponsor, Congressman Peter DeFazio of Oregon, found that almost 40 percent of borrowers who include their college loans in their bankruptcy filing had at least some of their debt discharged However, only 0.1 percent of people filing for bankruptcy tried to have their student loans discharged because of the difficulty of meeting court-imposed requirements for discharging this debt.

Proponents of this bill hope that more qualified borrowers will be eligible for debt relief by including their student loans in their bankruptcy filings. Generally, borrowers must prove that they cannot support themselves and their family because of the student debt and their financial situation is not expected to get better for several years.

All federal appeals courts, except for the 1st Circuit based in Boston and the 8th Circuit in St. Louis, use a three-part test to determine undue burden. A debtor must prove their inability to maintain a minimal standard of living if they repaid the loan, if the financial difficulties are temporary or will last several years and whether efforts were made to keep up with student loan payments before the bankruptcy filing.

The U.S. Department of Education is preparing guidance to determine whether a student is facing an undue burden by paying off student loan debt. Proposals on making loan discharge more accessible and changing the weight that each factor carries in the test used by the courts are also under consideration.

The Consumer Financial Protection Bureau reported that there were 44 million borrowers with student debt last year. Almost 11 percent of debt was at least 90 days delinquent at the beginning of March 2018, according to the Federal Reserve Bank of New York.

Debtors dealing with student and other debt should seek legal advice. A lawyer can discuss options for pursuing a fresh financial start.

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