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Congress Considering Bills to Allow Student Loans to Be Discharged More Easily in Bankruptcy

May 10, 2010

As Riverside consumer bankruptcy attorneys, we were extremely pleased to see that Congress is considering overhauling the way private student loans are treated in bankruptcy. As The Chronicle of Higher Education reported April 22, Congress is considering legislation that would allow people to discharge their private student loan debt more easily during a bankruptcy. Similar bills were introduced in the House and Senate in mid-April by Democratic lawmakers. In doing so, the lawmakers may have been acting on behalf of President Obama, who has said he would like to see student loan debt forgiven if it becomes burdensome for working borrowers.

Until 2005, private student loan debt was dischargeable in bankruptcy just like any other form of unsecured private debt (such as medical bills or credit card debt). But Congress passed a sweeping overhaul of bankruptcy law that year, and among the changes was a requirement that private student loan debt must pose an "undue hardship" before it can be discharged. This puts private student loans in the same protected category as federally backed loans -- which come with interest rate caps not available for private loans -- as well as child support and tax debt. Critics say this places too high a barrier to discharging the debt, and inappropriately uses federal power to shield private businesses from risk. In fact, some charge that private lenders don't look into whether a borrower can reasonably repay the loan before making it, a charge also made against subprime mortgage loans.

Under the Fairness for Struggling Students Act (Senate) and the Private Student Loan Bankruptcy Fairness Act (House), the "undue hardship" requirement would be removed for private student loans, but not federally backed student loan). That means private student loan debt would be treated like any other unsecured private debt in a bankruptcy, allowing it to be forgiven or modified much more easily. Proponents, including the bills' Democratic sponsors, say this would protect borrowers who are already bankrupt from being locked into a lifetime of debt obligation they can't reasonably pay back. Opponents, drawn mainly from Republicans, say removing the higher standard would encourage students to abuse the bankruptcy system by declaring bankruptcy just to get out of paying back debt, driving the interest rates up on private student loans.

As Long Beach individual bankruptcy lawyers, we think that's an unrealistic fear. In our professional experience, bankruptcy is a last resort that is emotionally unpleasant and harms your credit for years. It's worth noting that the "undue hardship" standard for private student loans is just under five years old, and that private lenders didn't charge the high interest rates or see the abuses they are now predicting before 2005. We believe this legislation would give bankruptcy judges the flexibility they need to forgive debts when the circumstances demand it. It would also end the practice of lending to anyone, regardless of their ability to repay, which lenders can do because they know the borrower won't be able to escape the obligation even by declaring bankruptcy. This has led some advocates to compare private student loans to subprime mortgage loans.

Howard Law PC represents Californians who are considering filing for bankruptcy as a way to deal with overwhelming personal debts. At the very beginning of the process, we meet with individuals and couples to help them determine whether their individual financial circumstances make bankruptcy their best choice. If it is not, we can help them consider other options, such as a loan modification or a predatory lending lawsuit. If our clients do want to pursue a bankruptcy, we can guide them through the complicated choice between Chapter 13 and Chapter 7 bankruptcies, the most common bankruptcies available to individuals. Our Irvine personal bankruptcy attorneys stand by our clients throughout the bankruptcy, from the initial credit counseling to the day a court declares their debt discharged.

If you're in so much debt that you don't think you can ever pay it back, you should talk to Howard Law. To set up a free, confidential evaluation of your case, send us a message through our website or call 1-800-872-5925 today.