Congress and the courts have over the years generally made it harder and harder for you to write off (“discharge”) student loans in bankruptcy. Most debts, such as credit cards, medical bills, old utilities and back rent, can be written off, or “discharged,” when you file a bankruptcy. But government-backed student loans almost never can. These can only be discharged if you prove extreme hardship, which is very hard to do. Most people don’t qualify. And it costs so much to try that in most cases the risk of not succeeding usually makes the attempt not worthwhile.
A few years ago Congress amended the bankruptcy laws in lots of major ways, mostly making it harder to file a bankruptcy and limiting the benefit to doing so. One of the amendments was to make private student loans just as difficult to discharge as government-backed ones. Overall, these private student loans make up only about 20% of all student loans, but that’s still about $170 billion. For many people it can amount to tens of thousands of dollars of student loan debt.
But then earlier this year some small steps were taken in the opposite direction. Bills were introduced in each of the houses of Congress which would again allow some private student loans (those not guaranteed by the state or federal government) to be discharged like most other debt, just like they used to be. The proposed bills are the Fairness for Struggling Students Act in the Senate, and the Private Loan Bankruptcy Fairness Act in the House of Representatives.
Here is what one of the sponsors of the House bill said in introducing the bill a few months ago:
Federal student loans offer certain protections to minimize the risk that a financially distressed debtor will need bankruptcy relief, whereas private student loans are not required to have, and often do not have, such consumer protections. For example, Federal loans have fixed interest rates, whereas private loans often have variable rates that can be as high as 19 percent. Unlike Federal loans, private loans have no limits on origination fees, which can be as high as 9.9 percent, with lenders often charging additional fees such as late fees or fees for any deferments or forbearance, and half of the private loans in one survey had no forbearance option at all. Federal loans also provide flexible options for distressed debtors, such as income-based repayment plans and partial or complete loan forgiveness in some circumstances, whereas private lenders are not required to offer such options. For these reasons, private loans should be dischargeable in bankruptcy.
Before the election a House subcommittees held a vote on its bill and passed it, sending it to the full judiciary committee for a vote. Unfortunately, it is now not likely that either of these bills will become law. But we will continue monitoring this to see what happens, so that we can use it for our clients if it does.
Portland Bankruptcy Law Group has the experience and knowledge to handle your case. Our bankruptcy lawyers are extremely familiar with and are well versed in all aspects of bankruptcy law. Contact us today!
