Summary: A recent report from the National Association of Consumer Bankruptcy Attorney calls for a change in the law regarding student loan debt. Citing student loan debt as an impending crisis to the economy, other experts agree the 1998 law prohibiting filing bankruptcy for student loans must be changed.
Forget home foreclosures and deep credit card debt, student loans are racing to the top of the list of causes for filing bankruptcy. The advice that it pays to have an education needs an update. It should say paybacks for an education could ruin your life.
A report issued recently by the National Association of Consumer Bankruptcy Attorneys cites student loan debt in the United States at $1 trillion while the nation’s credit card debt is supposedly about $798 billion. The two types of debt aren’t really comparable.
Those burdened with heavy credit card debt can file for relief through bankruptcy. Many file Chapter 7 and debts are erased. They have the opportunity financially to start over.
On the other hand, those burdened with excessive student loan payments do not have that option. By law, student loans cannot be discharged. Filing Chapter 13 can make a slight difference. During the payment plan period, borrowers are safe from collection activity. In addition, a judge decides on payment amounts. It’s possible for the payment or interest rate to be temporarily lowered.
Before a law passed in 1998 mandating no bankruptcy discharges for student loans, those loans were treated like any other debt. Students could eventually get financial relief by filing Chapter 7 bankruptcy. Courts could legally discharge student loans after 7 years of repayment.
Then legislators opted for the more extreme law currently in place. The only way student loans can be wiped out through bankruptcy these days is to claim and prove undue hardship.
Since 1998, the majority of borrowers claiming undue hardship status have been rejected. With a few exceptions, it is extremely difficult to gain undue hardship status for the purpose of wiping out student loan debt. When undue hardship is denied, borrowers are left with the choice of making payments or defaulting on the loan.
Complicated bankruptcy laws regarding student loans can be confusing for many consumers. For example, limited loan forgiveness plans do exist. Students working in some service careers such as teachers or firefighters, can have part of their student loans forgiven if they meet all the criteria. Unfortunately, students in the designated professions often end up not eligible for these programs due to minute details in the rules. Finally, the student loan trap is grabbing the attention of many politicians. Suggestions from constituents and bankruptcy attorneys are under careful consideration. The report issued by the bankruptcy attorney’s group, contends bankruptcy laws must change due to the drastic numbers of borrowers faced with little hope of ever getting out of debt.
President Obama recently addressed the student loan fiasco by proposing regulations to cap loan payments according to income. His plan would wipe out student loan balances after 20 years of payments. Those proposals could help future borrowers but they won’t help students already sinking from high payments for Federal or private loans secured prior to 2012.
Borrowers currently repaying sizable student loans should consult with a reputable St. Louis bankruptcy attorney. Bankruptcy questions regarding undue hardship or other concerns are best answered by those in the know.
With the hope of possible changes to stringent bankruptcy laws regarding student loan debt happening soon, current borrowers sinking in student loan debt can consider filing a Chapter 13 petition. The court can establishment a repayment plan and grant some protection from creditors during the repayment process.
Until Congress takes on the student loan dilemma and changes bankruptcy laws granting students the same relief as other debtors, options for those weighed down in debt are extremely limited. Consult with a St. Louis bankruptcy attorney for updates in the law and other bankruptcy questions.