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Congress Considers Bankruptcy Law Change to Allow Forgiveness of Private Student Loans

October 7, 2009

As Ontario bankruptcy attorneys, we are following with great interest proposed new legislation that would change the way student loans are treated in a personal bankruptcy. As Inside Higher Ed noted Sept. 24, a House subcommittee recently heard testimony on the issue of student loan forgiveness during bankruptcy. Under current law, no student loans can be discharged in bankruptcy, including loans from private lenders as well as government-backed loans. Rep. Steve Cohen, D-Tenn. and the chair of the subcommittee, said he will propose legislation that would revoke that privilege for private lenders, making their debt dischargeable just like credit cards, car loans and most other forms of loan debt.

Federal student loans have not been dischargeable in bankruptcy since 1978, but private student loans were dischargeable until 2005, when a provision giving them special treatment was part of that year's bankruptcy reform bill. (Bankruptcy courts may make an exception in cases of "undue hardship.") Critics of the change say this is unfair to consumers because private loans come with none of the consumer-friendly features of federal loans, such as low, fixed interest rates and flexible repayment. It also gives lenders who deal in student loans special treatment that their colleagues who make other types of loans don't get. According to the article, the rising cost of tuition and the $12,500 limit on government loans drove 14% of students to take out private loans in the 2007-2008 school year, up from just 4% in 2003-2004.

As Temple City bankruptcy lawyers, we would like to add that the bad economy is likely to worsen this problem. With fewer jobs available and experienced workers competing for entry-level jobs, many graduates with large amounts of debt have already had trouble paying their loans, or expect to have trouble soon. In fact, surveys have shown that heavy debt loans actually discourage younger adults from buying homes and having children. It's bad enough that these market forces could drive young people into bankruptcy -- and it's worse that the bankruptcy courts can't help them solve the problem by forgiving debt they truly cannot pay. We strongly support legislation to take away the unfair advantage that student lenders currently have in consumer bankruptcies.

Howard Law LLP helps individuals and families find solutions to debt that has become a burden, including but not at all limited to bankruptcy. When consumers come to us, our San Clemente bankruptcy attorneys start by reviewing their financial situations to make sure that bankruptcy is really the best choice for them. If it is, we can help clients negotiate the maze of legal requirements for filing a bankruptcy, from debt education to listing all debts to making and following a payment plan. If appropriate, we can also help resolve certain debts without bankruptcy through our debt settlement and mortgage loan modification practices. Our goal is to send each client home with a better financial situation and the tools to stay out of debt.

If you feel like you're drowning in debt and you're ready to find another way to handle it, you should talk to Howard Law LLP right away. To set up a free, completely confidential evaluation of your case, please contact us online or call 1-800-872-5925 today.