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New guidance on student loans and bankruptcy in California

On Behalf of | Nov 21, 2022 | Bankruptcy Law

California residents with unemployment or health issues might not have enough funds to cover their student loan payments. These troubled borrowers may look to bankruptcy laws for answers. New guidance on discharging student loan debts could give borrowers an idea about what to do.

Student loan discharge guidance

Discharging student loan debt once proved challenging in bankruptcy courts. However, in November of 2022, the Biden Administration, working with the Department of Justice and the Department of Education, issued new guidance that addresses the difficulties providing proof of undue hardship.

Bankruptcy laws open doors for discharging unsecured debt, such as credit cards, without proving the debt payments cause undue hardship. The new guidance issued on the federal level makes establishing undue hardship less complicated. In turn, asking the court to discharge student loan debt may be less hassle.

Bankruptcy protections

Those seeking bankruptcy protection must file under a particular chapter. Chapter 7 liquidation bankruptcy provides a way to receive a fresh start for those who qualify. Qualifying involves passing a means test that compares debt to income in light of the state’s median income. Under Chapter 7 bankruptcy, non-exempt assets would face liquidation to pay creditors. The remaining dent could face a discharge freeing the debtor of obligations.

Those who do not pass the means test for Chapter 7 could file for Chapter 13 bankruptcy. Under Chapter 13, the debtor agrees to a payment plan to satisfy debt obligations. The court may reduce the debt owed, and the debtor would make monthly payments for three to five years.

Unsecured debt, such as credit card obligations, may face full or partial discharge under the terms of Chapter 13. However, certain debts cannot undergo discharges, such as particular taxes due or child support. As noted above, relief now appears to exist for some student loan borrowers.