Bankruptcy Help on the Way for Student Loan Borrowers

student exiting school building

At long last, it appears that Congress is looking to help the millions of people saddled with student loan debt that they have no hope of ever totally repaying.   That help is coming through the bankruptcy laws being changed to make it possible to discharge (wipe out) those loans through bankruptcy proceedings.

Student loan debt has been a tremendous problem nationwide.  It is estimated that as many as forty-four million Americans owe more than $1.5 trillion in outstanding student loans.  That makes student loan debt second only to credit card debt as the highest category of debts owed by Americans.  The sponsor of the proposed legislation, Sen. Dick Durbin, hopes that it can be an escape clause for student loan borrowers who, he says, carry their student loan debts to their graves.

He introduced the bill, which is called the Student Borrower Bankruptcy Relief Act of 2019, on May 9, 2019.  Typically, a bill has to be considered by a committee before it is sent on to the Senate or House for a full vote.  If it should pass both houses of Congress, it will be enacted into law.  A company called Skofos Labs, which calculates a bill’s chance of enactment, gives it a 90% chance of making it into a new law.  If so, it would make both private and federal student loans eligible for discharge in bankruptcy like most other forms of consumer debts.

As the law stands now, the only way a student loan can be discharged in bankruptcy is if the borrower can show that having to repay it presents an “undue hardship” on him.  To successfully prove an undue hardship in most of the nation’s bankruptcy courts, the debtor/borrower has to show that 1) they can’t maintain a minimal standard of living if they are forced to repay their loans, 2) this circumstance is likely to persist in the future (a “certainty of hopelessness”), and 3) they have already made a good-faith effort to repay the loans.  Very few courts have been willing to find in favor of debtors who attempt discharges for undue hardships.  In fact, a recent survey on such cases across the county found only four cases were the courts believe the undue hardship was met.  So trying to bring a case before the bankruptcy court on this basis has been an exercise in futility, no matter how desperate the debtor’s circumstances were.

Many groups feel that it is time for the bankruptcy code (laws) to be updated, and that there is an extreme need at this time for the issue of student loan debt to be the focus of such an update.  The bankruptcy code was enacted in 1978, and its last major update was in 2005.  A lot has changed since 2005.  For one thing, Americans’ total student loan debt was so relatively small in 2005 that it wasn’t even listed in the Federal Reserve’s monthly reports on consumer debt.  Not so anymore!  One and a half-trillion dollars is a lot of debt!

So what is a student loan debtor to do right now?  If you are relatively debt-free except for student loans, you may be able to wait out the time until the Act is (hopefully!) enacted.  However, if other debt needs to be immediately addressed, you can seek bankruptcy relief right now to deal with that debt, and file once again, later on, to specifically address the student loan debt.  Obviously, there are certain time restrictions in the bankruptcy code in regard to refiling, but they are not insurmountable.

If student loan debt repayment is a significant factor in your life, you might want to schedule a consultation with a bankruptcy attorney knowledgeable in regard to the status of this proposed legislation to assess whether and when a bankruptcy could be helpful to achieving financial peace for you.