Senators aim to make private student loans dischargeable in bankruptcy

February 23, 2013

Senators aim to make private student loans dischargeable in bankruptcy

Article provided by Charles R. Nettles, Attorney at Law
Visit us at http://www.cnbankruptcylaw.com

Although student loan debt is a growing burden for many in America, since 2005 it is almost always ineligible for discharge in personal bankruptcy. A group of U.S. senators has re-introduced legislation that would make private student loan debt dischargeable, though, aiming to help people emerge from bankruptcy with a fresh financial start and to make money available for other investments that would boost the sagging economy, such as buying a home.

The Fairness for Struggling Students Act

The bill is called The Fairness for Struggling Students Act. Senator Dick Durbin of Illinois first proposed the legislation in 2012, and he is joined by Senator Sheldon Whitehouse of Rhode Island and Senator Jack Reed of Illinois in sponsoring the bill in 2013. The Act would treat privately issued student loans the same as other types of consumer debt in bankruptcy and make private student loan debt eligible for discharge.

Student loans issued by the federal government have not been eligible for discharge in bankruptcy since 1978, reports the Huffington Post, in order to protect taxpayer money. In 2005, this protection was extended to private student loans, even though the characteristics of these loans can be quite different. In general, government student loans have lower interest rates and greater consumer protections, such as income-based repayment plans and additional deferment and forbearance options for those struggling to pay off their debt.

Student loan debt is the largest type of consumer debt in the U.S., with at least $1 trillion owing, in comparison to $8 trillion in mortgage debt and even exceeding credit card debt at $858 billion, according to statistics from the Huffington Post and the Federal Reserve Bank. Of these common types of consumer debt, though, private student loans remain the only kind that usually cannot be discharged in bankruptcy.

Debt discharge in bankruptcy

Through personal bankruptcy, individuals may be able to discharge certain debts to help them get back on their feet financially. Debts that may be discharged upon completion of bankruptcy include:
-Credit card debt
-Mortgage debt
-Medical bills
-Utility bills

As mentioned, however, certain types of debt usually cannot be discharged in bankruptcy, including
-Unpaid taxes
-Child and spousal support arrearages
-Private student loan debt

Even though these types of debt may not be discharged, eliminating or reorganizing other debt in bankruptcy can help free up money to pay them off.

Time will tell whether private student loans will become dischargeable in bankruptcy. Regardless of the outcome, though, bankruptcy remains a valuable option for people overwhelmed with debt. If you are struggling to make ends meet and bills are piling up, contact an experienced bankruptcy attorney to learn more about how bankruptcy may help you.