Proposed Bill Could Allow Discharge of Private Student Loans in Bankruptcy
Some good news for debtors struggling with private student loan debt: a bill is headed to the Judiciary Committee which may allow private student loans to be discharged in bankruptcy. I received this email from the National Association of Consumer Bankruptcy Attorneys earlier today:
Dear NACBA Member,
Yesterday, the House Judiciary Subcommittee on Commercial and Administrative Law took the first steps in reversing language in the 2005 bankruptcy law related to private student loan debt by approving on a 6-3 party line vote H.R. 5043, the Private Student Loan Bankruptcy Fairness Act. NACBA has been actively involved in helping to draft and supporting the legislation which will restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt. Under the bill, privately issued student loans will once again be dischargeable in bankruptcy. To view a text of the legislation, go to http://thomas.loc.gov and insert the bill number.
The bill now goes before the full Judiciary Committee. Though time is short in this legislative session, we are hopeful that the bill will see full Committee action before the end of the year. Similar legislation has been introduced in the Senate (S. 3219) by Senators Durbin (D, IL), Whitehouse (D, RI) and Franken (D, MN).
We know that many NACBA members are confronted by clients with substantial student loan debt, both private and government-issued. Yesterday’s action was the first step in restoring fairness to the bankruptcy process.
Student loans are a growing concern for many families. For those with Federal Student Loans they can opt for deferral or Income-Based Repayment. There is very little that can be done to help those struggling with private student loan debt. I’ll keep you posted on the bill’s progress.
Income Based Repayment Can Ease Student Loan Payments
New Student Loan Legislation Doesn’t Help Existing Borrowers
The Health Care and Education Reconciliation Act 2010 (aptly known by some as “the new health care law”) has made tremendous waves throughout the news media, twitter, facebook and for talking heads on TV. However, some folks may overlook the “Making College More Affordable” program contained within the new legislation.
Many of our clients are burdened with student loan debt, so I was curious if the new law provided relief for existing borrowers.
The good news is that new borrowers will have an easier time repaying their loans:
“New borrowers who assume loans after July 1, 2014, will be able to cap their student loan repayments at 10 percent of their discretionary income and, if they keep up with their payments over time, will have the balance forgiven after 20 years. Public service workers – such as teachers, nurses, and those in military service – will see any remaining debt forgiven after just 10 years. More than 1.2 million new borrowers are projected to qualify and take part in the expanded IBR program.”
The bad news is that there isn’t additional relief for existing borrowers.
Existing Borrowers Should Explore Income Based Relief
Income Based Relief may allow qualified borrowers with federal student loans (except PLUS) to drastically reduce their monthly student loan payments. In some cases, a borrower pays what they can for 10 or 25 years and the balance is then eliminated provided they made qualifying payments for the applicable term. IBR has been around since 2009, and the website I encourage you to visit is: ibrinfo.org.
Unfortunately, private student loans are not covered using IBR. If you are unsure if your student loans are federal, call your student loan lender and ask.
Once you’re certain your loans are federal (except PLUS loans) your next step should be to contact your lender and get the paperwork started.
Student Loans and Bankruptcy
Eliminating or modifying student loans through bankruptcy is difficult, if not impossible for some clients. However, you should consider all your options. A chapter 13 bankruptcy provides even more flexibility in handling student loan debt, even though you can’t discharge it. Filing a chapter 7 or chapter 13 bankruptcy operates as an automatic stay, and prevents collection efforts against you for the duration of your case.
The first step when considering any student loan for discharge is to see what type of student loan you have. A student loan cannot be discharged if it was “made, insured or guaranteed by any governmental unit, or made under any program funded in whole or in part by a government or a nonprofit institution.” If your loan cannot be discharged, the next analysis is to determine if you are eligible for an “undue hardship” exception. A successful motion may eliminate or reduce your student loan if the right factors are present in your case.
Our office handles student loans through bankruptcy and we would be happy to analyze your situation during a free initial consultation.