It is no secret that the cost of higher education is steadily rising each year, forcing many young adults to take out student loans for substantial amounts in order to pay for it. It is also generally known that the amounts owed by many of these borrowers upon graduation are well beyond their ability to pay, pushing some to explore the possibility of discharging their student loan debt in bankruptcy proceedings. Unfortunately, discharging student loan debt in bankruptcy is extremely difficult, and while federal student loan lenders are bound by government guidelines designed to make repayment of the loans a manageable expense for borrowers, private student loans lenders are not regulated by similar rules. The Obama Administration is hoping to provide some relief for private student loan borrowers and issued a report through the Department of Education calling on Congress to revise a law issued in 2005 at the behest of private lenders that made it much more difficult to discharge a private student loan debt in bankruptcy proceedings. An examination of what the report specifically recommended and how that compares to the current situation for private student loan borrowers in bankruptcy will appear below.
Proposed Changes to Bankruptcy Law
The proposed changes to the bankruptcy code would permit private student loan debts to be dischargeable like other consumer debt, provided the lenders did not offer borrowers flexible repayment plans, similar to the ones required for federally-guaranteed student loans. The purpose behind the new recommendation is to encourage private lenders to adopt terms that permit payment modification options when the borrower is unable to make the standard payments. The Administration supported the high bar for discharging federal student loan debt due to the protections and expansive repayment terms offered borrowers. In addition, unlike private student loans, federal student loans are not underwritten.
Current Bankruptcy Law for Private Student Loans
Presently, there is an exception to discharge for “qualified educational loans,” which courts have held to include private student loans. This exception will automatically apply unless the debtor can show that not discharging the debt would “impose an undue hardship on the debtor and the debtor’s dependants.” What this means in real world terms is that the debtor must prove that repaying the student loan debt would render the debtor unable to provide minimal support for him/herself and any dependants. Furthermore, the debtor must convince the court that this hardship is highly likely to continue during most of the repayment period, and the debtor made good faith attempts to pay the debt. This hardship standard applies to both federal and private student loans, and while this standard does not absolutely preclude the debtor from receiving discharge for a student loan debt, it is a very high bar that a significant number of debtors would be unable to meet. It is also worth noting that federal student loans borrowers that have loans in default are also subject to wage garnishment up to 15 percent of the borrower’s income and a reduction in Social Security disability and retirement benefits up to 15 percent.
Consult With an Attorney
Deciding to file bankruptcy is never an easy decision and is usually pursued as a last resort. However, if you are dealing with overwhelming debt and believe bankruptcy may be the best option for you, working with a knowledgeable bankruptcy lawyer will help to ensure you receive the best possible outcome. Christopher L. Arrington, Attorney at Law, P.C. offers services in the Indianapolis area and is available to assist you with your bankruptcy questions and concerns. Contact him today to schedule an appointment.