Changes in the Law to Allow Student Debt to be Discharged in Bankruptcy
The Student Borrower Bankruptcy Relief Act of 2019 would eliminate the section of the bankruptcy code that currently makes private and federal student loans non-dischargeable, allowing these loans to be treated like nearly all other forms of consumer debt.
Student Loans Can’t Be Discharged… Yet
Most forms of debt, like medical and credit card debt, can be eliminated through the bankruptcy process. Only a few debts, like alimony, child support payments, certain past due taxes, and criminal fines, are treated as non-dischargeable in bankruptcy. However, current federal law also makes student loan debt non-dischargeable except in extremely rare cases. Since this country’s founding, Americans have had the ability to start over through bankruptcy.
Student Loans Were Dischargeable Until
Up until 1976, federal and private student loan debt were both completely dischargeable in bankruptcy. Then Congress got into the act and began steadily narrowing the grounds upon student loan debts could be discharged. In 1998, Congress rendered federal student loans completely non-dischargeable absent a showing of “undue hardship” which courts have construed to be nearly impossible to demonstrate.
In 2005, despite fierce opposition from consumer protection advocates, including then-bankruptcy professor Elizabeth Warren, Congress even made private student loans non-dischargeable in bankruptcy. As a result, student borrowers who find themselves unable to repay their loans are now saddled with this debt for life. Sadly these loans are not eligible for the alternative payments plans that are now offered to public student loans.
The rationale behind making thee private student loans non-dischargeable is fairly suspect. How are private student loans, generally high-interest obligations, offered by banks for profit similar to other non-dischargeable debts where the idea is that the debts should not be discharged to protect either victims or the public good.
Student Loan Debt Burden
In any event, nearly 45 million Americans now owe over $1.5 trillion in student loan debt. Cumulative student loan debt has passed credit card debt and is now the second largest category of private consumer debt after mortgages. Moreover, student loan debt is the fastest growing segment of U.S. household debt, increasing by over 150 percent in the last decade. At the present time, Arizona graduates carry an average of $23,000 in student loan debt.
Non-dischargeable student loan debt is obviously hampering the career and life choices of student borrowers. Studies conducted by the Federal Reserve show that the student debt burden is adversely impacting the broader economy.
Student Borrower Bankruptcy Relief Act of 2019
If the Student Borrower Bankruptcy Relief Act of 2019 were enacted, it wouldn’t mean that the floodgates would open and all student loan borrowers would be able to discharge their student loans.
It is worth remembering that there are substantial income eligibility cutoffs for Chapter 7 bankruptcy that would keep a substantial portion of student loan borrowers from getting rid of their student loan quickly. Even Chapter 13 bankruptcy would require most student loan borrowers to remain under the jurisdiction of the bankruptcy court for five years while they made payments to all their creditors. In essence, the student loan discharge would become available really only to those that needed it. Let’s hope it happens soon.
Contact a Phoenix Bankruptcy Attorney
If you are buried under a mountain of student loan debt, the Student Borrower Bankruptcy Relief Act of 2019 may provide some much-needed relief. However, if you just cannot make ends meet and you are facing a financial crisis like foreclosure, repossession or wage garnishment, you may not be able to wait to see if this materializes. There are some solutions right now that may help you resolve your financial hardship. The attorneys at Phoenix Fresh Start Bankruptcy Attorneys, we have helped thousands of people like you get out of debt and fix their credit through bankruptcy. Call us today.