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Officials Reviewing Hardship Rules for Student Bankruptcy

By William Vogeler, Esq. on February 22, 2018 | Last updated on March 21, 2019

The good news is the Trump administration is looking at rules that could make it easier for students to bankrupt school debt.

The bad news is that it's not really up to the administration; the legislature has the power to change the rules and the courts have the job of interpreting them. For now, lenders like the rules the way they are.

In any case, nobody really likes the dark doors of bankruptcy court. But there's a glimmer of hope for law students and lawyers who can't make it because school loans are killing them.

Two Tests for Hardship

In a public notice, the U.S. Department of Education said it is reviewing how "undue hardship" is evaluated in bankruptcy proceedings. Congress said students may make an undue hardship claim to erase school debt, but bankruptcy courts have exacting standards that make it hard to qualify.

Using a "totality of circumstances test," the courts look at the debtor's past, present and future financial resources, reasonably necessary living expenses and other relevant facts.

Under a second standard, the debtor must show that he or she cannot maintain a minimal standard of living, that the circumstances will persist for a significant time, and that the debtor has made good faith efforts to pay the loans.

The education department said it will evaluate whether using two tests "results in inequities among borrowers." The department accepts public comments through its rulemaking portal, by mail or hand-delivery.

'Inadvertently Discouraged'

The ABA Journal reported the department wants to ensure that student borrowers aren't "inadvertently discouraged" from seeking to discharge their loans.

In the meantime, reports suggest that law school debts are declining. Last year, law students graduated with less debt than three years ago.

Making adjustments for inflation, a Pepperdine Law School professor said two thirds of the nationally ranked law schools showed lower student debt between 2013 and 2016.

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