Bankruptcy and Student Loans
Recent years have seen the economy stagnate, leaving many to look for work. In early June of 2011, the Associated Press reported that the U.S. unemployment rate rose to 9.1 percent. Being out of work creates a difficult financial situation for many, especially those who have debts to pay.
For the unemployed with credit card debt or medical bills, bankruptcy provides a way to eliminate debt and receive a fresh start. For the unemployed who are carrying vast amounts of student loan debt, however, bankruptcy may not provide as much relief as needed. Generally, student loan debts are not dischargeable in bankruptcy, with one minor exception.
Since 1978, federal student loans have been non-dischargeable, but private loans, which usually carry much higher interest rates, were dischargeable. In 2005, however, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which made private student loans non-dischargeable in bankruptcy. Meaning, after bankruptcy, a debtor will be left making student loan payments, even if student loans were the bulk of the debtor's debt prior to bankruptcy.
Undue Hardship
There is one exception. If a debtor can prove undue hardship, which is very difficult to establish, student loans may be discharged. To prove undue hardship, three elements must be met:
- Minimum standard of living - the debtor must prove that a minimum standard of living cannot be maintained if made to repay student loans
- Continuation of situation - the debtor must prove that the current financial difficulties are likely to continue for an extended period of time; possibly because of prolonged disability
- Honest effort - the debtor must have made an honest attempt to make his or her student loan payments
Proposed Legislation
Senator Dick Durbin (D-IL) introduced legislation in early 2011 to return to the pre-2005 bankruptcy laws as they pertain to student loans. According to a release by the senator's office, the legislation is intended to "restore fairness in student lending." If passed, this would make private student loans dischargeable in bankruptcy.
Sen. Durbin has introduced similar legislation in recent years which has not passed, so the likelihood that the current legislation will pass is uncertain.
Even though student loans are generally non-dischargeable during bankruptcy, if you are struggling financially, it is still a good idea to speak with an experienced bankruptcy attorney to explore all of the options you have for debt relief. In some circumstances, eliminating credit card or other debt may provide a debtor with enough relief to make student loan payments manageable.
