Changes in Bankruptcy Law For Student Loans

Changes in bankruptcy law for student loans may be on the horizon if a bill by Senators Richard Durbin of Illinois, Sheldon Whitehouse from Rhode Island, and Al Franken from Minnesota gets passed. Called the Fairness for Struggling Students Act, the senators introduced the new bill on April 15, 2010.

At the same time, a separate bill called the Private Student Loan Bankruptcy Fairness Act was introduced in the House of Representatives by Representatives Steve Cohen from Tennessee and Danny Davis from Illinois. Both of these bills aim to make it easier for people to have student loans discharged in bankruptcy court.

Back in the 1970s, many students, having secured employment after graduation, found loopholes in the U.S. Bankruptcy laws that allowed them to declare for bankruptcy and have their student loans discharged. Congress made changes in bankruptcy law for student loans in the late 1990s in order to stop people from taking advantage of this flaw in the bankruptcy code. What the changes did, however, was to make discharging student loans almost impossible, creating difficult situations for people already saddled with other debts.

They could have all their credit card, loans, and other debts wiped clean from their records through bankruptcy, but still have enormous student loan debts to pay off after having declared for bankruptcy, preventing them from ever getting out of debt.

Student loans can only be discharged under extremely stringent conditions in which the burden of the student loan is so great that repaying the loan would result in extreme hardship for the borrower. The laws are so tough in fact, that of the 72000 people who attempted to have their student loans discharged through bankruptcy in 2008, only 29 out of the 72000 had their student debts cleared completely.

The new bills that advocate changes in bankruptcy law for student loans, introduced recently, aim to change the classification of private student loans to private consumer loans. By making the change in distinction, these private consumer loans would be eligible for discharge through bankruptcy like most other private debts would be. The new bills would keep the status of federal student loans as they currently are, still exempting them from bankruptcy discharge.

Feelings about the new bills are mixed. Some supporters say that it is only fair that if other debts like car notes, mortgages, bank loans, and credit cards can be discharged, student loans should be no different. After all, the point of filing for bankruptcy is to give a person a fresh financial start. Others claim that the bill targets private lenders unfairly, making it less likely that they will lend to needy students if student loans can be discharged by bankruptcy.

Both bills are due for discussion in committees before the current term ends. If they pass committee voting, they will be up for full House or Senate vote.

Comments (1)

Student Loan Settlement said:

... If this bill finally gets passed, it will bring a huge relief to many struggling students. fying. I been following up the topic of US debt for quite some time now, and lately I was shocked by what I found out. Student loan debt is $849 billion and _rising. Student loan debt surpassed credit card debt for the first time in the history of the United States.Please write to your local congressman in regards to supporting this bill.

August 01, 2011