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Advocates Push Student Loan Forgiveness in Bankruptcy

September 11, 2012

Prior to 2005, it was possible to discharge private student loan debts in a Chapter 7 bankruptcy. graduationcap.jpg

Unfortunately, as Los Angeles Bankruptcy Attorney Vincent Howard of HOWARD LAW has previously reported, it isn't possible anymore, except in rare circumstances.

However, advocates are now pushing harder than ever for the legislature to change this.

A spokesman for the U.S. Public Interest Research Group, was quoted as saying that students with mounds of debt are essentially put in "a special circle of bankruptcy hell," typically reserved for deadbeat dads and people who don't pay their taxes. What he means by this is that those are a few of the other select debts that can't be discharged in a bankruptcy: child support payments and overdue taxes.

It's also true that even if private student loans were dischargeable under a Chapter 7, it's not as if you would have hoards of people seeking it out. That's because bankruptcy is not something people take lightly. It's a fresh start, yes, but it's not one that anyone enters blindly. It can temporarily impact your credit and your ability to obtain loans.

That said, the 2005 law was passed prior to the burst of the housing bubble and subsequent economic crisis. So what we have now are people who are burdened with student loan debt, are underwater on mortgage payments and can't find a job. If they are also battling an illness, they may literally be drowning in debt.

During the 2007-2008 school year, about half of all four-year students at for-profit schools held private loans for tuition. At the beginning of this year, national student loan debt reached over $1 trillion. That's more than credit cards. That's more than car loans. In fact, that's more than any other type of consumer debt.

No one ever enters school thinking they are going to be the one unable to find a job when they graduate. But it's happening more frequently than ever now - even to good students who work hard and do all the right things.

The 2005 change in the law was part of the Bankruptcy Abuse Prevention and Consumer Protection Act. Legislators who passed the law have said that even if they did again allow private student loan debt to be discharged, it wouldn't tackle the issue of rising tuition and it would only account for about 15 percent of the overall student loan debt (the majority of which is federal). This is true, but here's the thing when comparing federal student loans to private loans:

  • Federal loans have income-based repayment options;
  • Federal student loans have far lower interest rates than private loans;
  • Federal and state loans allow a portion of loan forgiveness if the individual enters certain public service fields;
  • Federal loans allow forbearance and deferment periods not typically available for private loans.
Even the Obama administration has called for reform, and a number of proposals are on the table with regard to this issue.

In the meantime, don't count bankruptcy out as an option to help you with debt. Freeing you from other debt burdens can give you the ability not only to stay afloat, but to excel.

Los Angeles Bankruptcy Attorney Vincent Howard at HOWARD LAW can help. You can reach us toll-free at 1-800-872-5925 or send us a message online.

Additional Resources:
Private Student Loan Bankruptcy Rule Traps Graduates With Debt Amid Calls For Reform, Aug. 15, 2012, By Tyler Kingkade, The Huffington Post

More Blog Entries:
Nielson v. ACS, Inc. Shows How Tough Student Debt is to Discharge, Aug. 5, 2012, Los Angeles Chapter 7 Bankruptcy Lawyer Blog