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Bankrupt Student Loan Borrowers Could Finally Get A Break

Bankrupt Student Loan Borrowers Could Finally Get A Break

A report issued today by the Commission on Consumer Bankruptcy of the American Bankruptcy Institute recommends substantial changes to how student loans are treated in bankruptcy. Under current law (11 U.S.C. §523(a)(8)), a court must find that an “undue hardship” upon the Debtor or dependents would result if the court did not discharge a student loan. Cases interpreting the “undue hardship” test, however, have set the bar so high that it is exceedingly difficult to discharge a student loan in bankruptcy.

Noting that the Bankruptcy Code has not been significantly amended since 2005 and that student borrowers now owe approximately $1.5 trillion, the Commission argues that the Code should be amended to provide some measure of relief to these borrowers. In some states, the average student loan debt exceeds $30,000, and it is not uncommon for some borrowers to have in excess of $100,000 in debt. As noted by retired Bankruptcy Judge Elizabeth Perris (who co-chaired the Commission’s report),

“Debt hanging over the debtor forever has a cost. It’s a cost in terms of lack of purchase of houses, cars, having children and we just recognize that at a certain point for those people who want to avail themselves of bankruptcy, they ought to be able to get the fresh start and move on with their lives.”

In order to help borrowers deal with the staggering amount of debt, the Commission has outlined three key recommendations:

● Allowing private student loans to be discharged;
● Allowing government-guaranteed student loans to be discharged after they have been in repayment for more than seven years; and
● Encouraging bankruptcy judges to revisit the “undue hardship” test so that a judge could evaluate whether the borrower could reasonably pay the debt back within the contractual term of the loan — typically 10 years — and whether doing so would keep them from meeting basic living expenses.

The Commission has also recommended that the Department of Education set clear guidelines with respect to efforts to oppose discharge saying won’t oppose a student if the borrower is eligible for Social Security or Veterans Affairs disability benefits or falls below certain poverty thresholds.

Whether these proposal face any realistic change of passing in Congress is anybody’s guess. Even one of the commissioners – Dalié Jiménez, a U.C. Irvine Law School professor – indicated that she was not sure Congress would be amenable to a change in the law allowing student loans to be discharged over a period of time.

This post is intended to be purely informational in nature, and cannot be considered legal advice. If you have questions related to bankruptcy, please call our office at (503) 545-1061 (Portland metropolitan area cases) or (541) 972-3351 (Eugene area cases) to schedule a free initial consultation.

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