Class Action Lawsuit May Change the Way Federal Courts Handle Student Loan Bankruptcy

As increases in educational costs far outpaced wage growth in recent decades, the student debt swelled to historic levels.

Student loan balances have increased 150% in the last decade, and as of early 2018, outstanding student loans totaled $1.49 trillion. With slow wage growth, and rising costs, the pressure on borrowers on a national scale continues to get worse. Lawmakers have been slow to provide solutions, and attorneys, have started a growing trend out of necessity for their clients. In addition to the effect debt has on an individual, student loan debt can stifle economic growth on a macro level, with borrowers putting off major purchases and cutting back on spending.

Attorneys across the country have been successfully challenging the conventional wisdom that student loan debt is almost impossible to discharge, and exploding myths about student loan debt in the process. In a class action lawsuit against Navient, one of the largest student loan servicers in the U.S., a Texas Bankruptcy judge has denied the defendant’s motion to dismiss, making clear that funds received as an “educational benefit” are not necessarily exempt from discharge in bankruptcy.

This case will move forward, and could have a lasting impact on the way student loans are treated in bankruptcy cases. The ruling has given hope to many burdened with large student loan debts, and it will allow the federal appellate court to weigh in on which student loans are eligible for discharge in bankruptcy. If nothing else, the case may bring greater clarity to application of the bankruptcy code to student loans.

Changes on the horizon

Regulatory changes may also be on the horizon, as the Department of Education is reviewing what standards are appropriate for discharging student loans in bankruptcy. The public comment period regarding factors that should be considered is from February 21, 2018 to May 22, 2018.

As more borrowers successfully discharge at least a portion of their student loans, more attorneys are willing to represent student loan borrowers and include student loan debt in bankruptcy filings. Accordingly, it is becoming less common for judges to approach bankruptcy cases with an assumption that student loans should not be discharged.

Federal bankruptcy courts have varying interpretations of the Bankruptcy code as it pertains to student loans. Student loan debt may be discharged, either partially or fully, in bankruptcy. There are several possible outcomes depending on the debtor’s circumstances, but it is best to show a court you have made a good faith effort to repay the loans.

Contact a skilled Texas bankruptcy lawyer

If you would like to learn more about bankruptcy and student loan debt, contact a skilled Texas bankruptcy attorney with Marcos D. Oliva, P.C.

Marcos Oliva
About the Author: Marcos Oliva
Marcos Oliva is the principal attorney at Oliva Law. He is admitted to practice law in the State of Texas, the United States District and Bankruptcy Courts in the Southern District of Texas, and the United States Patent and Trademark Office.