Student loan debt was put on pause in March of 2020, at the beginning of the pandemic. In the five years since, the pause was extended multiple times. Most borrowers were technically required to start repaying in October of 2023, but the pressure was low. There were no penalties for delinquency in the early months, and the Department of Education (DOE) wasn’t pursuing involuntary collections.
That ended May 5, on the heels of some other bad news for student loan borrowers. In February, the 8th Circuit Court of Appeals blocked the SAVE plan, which would have reduced payments for many borrowers and accelerated forgiveness of some remaining balances. That means millions of student loan borrowers may be facing higher monthly payments than they anticipated.
Don’t despair. You may still have options, including a powerful tool you may not know about.
The Bankruptcy Solution No One is Talking About
News reports and social media feeds have been filled with bad news about the hopes for widespread student loan forgiveness, legal challenges, the Trump administration’s changes to Biden-era payment plans and more. For some reason, there’s been far less attention on the most significant positive change for student loan debtors in decades.
You’ve almost certainly heard that it’s “impossible” to discharge student loan debt in bankruptcy. While it’s never been impossible, it used to be extremely difficult. The burden on the borrower to establish “undue hardship” was set very high. That changed in November of 2022, when the Department of Justice (DOJ) attorneys received new borrower-friendly guidance on how to respond when a bankruptcy filer requested discharge of their student loans in bankruptcy.
Discharging student loans in bankruptcy is easier now than at any time since 1998—but the opportunity may not last.
The information below offers an overview of what comes next and some of the options that may be available for managing your student loans. There’s no substitute for personalized advice from a knowledgeable professional, though. You can schedule a free consultation with an experienced debt resolution lawyer at Borowitz & Clark by calling 877-439-9717.
What’s Next for Student Loan Collections?
The DOE restarted collection activity on defaulted student loans on May 5. The first stage will involve restarting Treasury offsets. That means student loan borrowers who are in default may have their tax refunds seized and Social Security payments garnished. The DOE will also begin pursuing administrative wage garnishment, meaning that up to 15% of your paycheck may be withheld and paid directly to the government.
Student loan borrowers who are in default will have a window of opportunity to avoid these actions.
How to Know Whether Your Loan is Subject to Involuntary Collection
The government considers a student loan to be in default if it is 270 days past due. At that point, the default may be reported to credit reporting agencies and impact your credit score and access to credit. However, the DOE currently says the re-upped collection actions will be focused on the 5.3 million borrowers who are more than 360 days past due.
When the government plans to offset your tax refund, garnish other government benefits, or garnish your wages, you will receive written notice of their intent. That notice will give you a deadline to take action to avoid the offset or garnishment. That may mean using an option offered by the government, such as student loan rehabilitation or successfully seeking a forbearance. Or it may mean seeking outside solutions such as bankruptcy.
What’s New in Bankruptcy for Student Loan Borrowers
Bankruptcy law itself hasn’t changed, and a student loan borrower still has to establish undue hardship in order to discharge student loan debt. The big change is in the way government lawyers apply those guidelines. Under the new and far less stringent guidelines, DOJ attorneys are instructed to stipulate that undue hardship exists if the student loan borrower shows that:
- They presently lack an ability to repay the loan,
- Their inability to pay the loan is likely to persist in the future, and
- They have acted in good faith in the past in attempting to repay the loan
The new guidelines have not only streamlined the process, but have also dramatically increased success rates.
85% of those attempting to discharge student loans under the new guidance have receive a full or partial discharge.
Filing Bankruptcy Can Pause Student Loan Collections Instantly
In most bankruptcy cases, the court enters an automatic stay as soon as the bankruptcy petition is filed. The automatic stay is a court order that tells creditors and debt collectors to temporarily stop all collection action. That includes lawsuits, phone calls, threatening letters, wage garnishments and other collection activity.
The automatic stay will typically prevent any collection action on your student loans while you pursue discharge.
How Do You Get a Student Loan Discharge in Bankruptcy?
Discharging student loans still isn’t as simple as discharging a credit card debt or medical bill. You’ll want an experienced bankruptcy lawyer to guide you through the process.
To pursue discharge of your student loans in bankruptcy, your attorney will have to file an adversary proceeding. An adversary proceeding is like a mini-lawsuit inside your bankruptcy case. You’ll be asked to provide extensive information to demonstrate the three points listed above. Then, the DOJ will have an opportunity to review your information and make a recommendation to the bankruptcy judge.
The DOJ may recommend that your loans be completely discharged, be partially discharged, or not be discharged. If you disagree with the DOJ’s recommendation, the judge will make the final decision.
Talk to a Los Angeles Bankruptcy Attorney about Your Student Loans
If you’re in default or otherwise struggling with your student loans, the time to talk to an experienced Los Angeles bankruptcy attorney is now–and not just because collections are starting up again. The new guidance that makes discharging student loans more likely than ever was issued under the Biden administration, and there’s no way to know how long this relief will be available.
At Borowitz & Clark, we have helped tens of thousands of Californians resolve their debt and build brighter financial futures. We know how important it is for you to have complete and accurate information about how bankruptcy might play out in your specific circumstances. That’s why we offer free consultations to people struggling with debt in and around Los Angeles. You can schedule yours today by calling 877-439-9717 or filling out our contact form.