When hard times come and you can’t pay all your bills, bankruptcy is sometimes the best option. Not only does it give you the debt relief you need if you’re severely overextended on your bills, but it also gives you a fresh start. There are many advantages to declaring bankruptcy. However, one particular debt, your student loan, is currently covered under a “creditor-friendly” provision in the bankruptcy reform law from 2005 that makes it nearly impossible for you to discharge students loans in bankruptcy. That means that even in your toughest of financial times, those students loans have to get paid. Luckily, Congress is discussing new legislation that could change everything.
Known as the Private Student Loan Bankruptcy Fairness Act (H.R. 5043), Representatives Steve Cohen of Tennessee and Danny Davis of Illinois originally introduced the proposed legislation into the House on April 15. The Act would overturn the “creditor-friendly” provision in the bankruptcy reform law from 2005. Under this provision, borrowers with student loan debt must show that repaying students loans will result in “undue hardship” to have student loans discharged in bankruptcy. This is very difficult to prove since “undue hardship” is a legal standard with very stringent requirements. The undue hardship standard is generally reserved for other government and court-mandated obligations such as child support, alimony or unpaid criminal fines. Borrowers don’t have to prove undue hardship to discharge other typical loans such as home mortgages or car loans in bankruptcy. The bankruptcy reform law makes it almost impossible for distressed borrowers to rid themselves of the burden of student loans without meeting rigorous requirements, and often once those requirements are met, it’s still impossible to discharge the loans, leaving borrowers who played by all the rules with the short end of the stick.
However, this new legislation will give borrowers a great deal of relief. Under the legislation, student loans would be treated like other consumer debt and borrowers would be able to more easily discharge them in bankruptcy. In a press release, Lauren Asher, President of the Institute for College Access and Success said “Today, the House Judiciary Committees Subcommittee on Commercial and Administrative Law took a stand for students and consumers.” (“Bankruptcy Relief for Private Student Loan Borrowers Advances,” TICAS press release, Sept. 15, 2010). She also mentioned, that under the new legislation, student loan debt would be treated more like consumer debt and less like overdue criminal fines.
Hard times can come as a surprise to anyone, but now people who took out loans for higher education don’t have to feel trapped. The government is looking for ways to help out. Hopefully, the House will come to a decision very soon and millions of borrowers all over the country will feel a heavy weight lifted off their shoulders.
Robert Zangrilli is the CEO of Franklin Debt Relief, a leading provider of credit card debt settlement programs.
