Bankruptcy Protections for Students with Private Loans

Posted on December 8, 2011 at 2:44pm by

To help those burdened with student loans, several members of Congress introduced legislation in April of 2010 that would treat private student loans the same as other consumer debt. Entitled “The Private Student Loan Bankruptcy Fairness Act,” the legislation would be a major change, permitting people who file for bankruptcy to discharge private student loan debt – something rarely possible in the past. A Kansas City bankruptcy attorney can help you understand bankruptcy laws regarding student loans and other types of debt if you are experiencing financial difficulties.

Discharging Student Debt and the Undue Hardship Requirement

In 2008, only 0.4% of federal student loan borrowers who filed for bankruptcy even attempted to discharge their student loan debt. The website FinAid estimates that less than 1% of private student loan borrowers in bankruptcy attempt to seek a hardship discharge of that obligation, and less than half of those people are successful.

The reason for the difficulties for private student loan borrowers stems from 2005 legislation that classified private student loans as education loans, even though the private ones did not carry any of the special features of government loans like a government guarantee and taxpayer subsidies. Because students receive these benefits with government loans or guarantees, they are not able to discharge the loans via bankruptcy in most cases. The 2005 law put private education loans into the same category as government ones – almost always non-dischargeable in the event of bankruptcy.

The 2010 act seeks to reverse parts of the 2005 law that gave special protections to private student loan lenders. These protections made it nearly impossible to discharge private student loans, even though bankruptcy would discharge nearly every other type of private consumer debt.

Discharging private student loan debt currently requires a showing of “undue hardship,” a standard rarely met. Courts typically refer to the following three requirements that a person must meet to qualify for undue hardship to receive a discharge of their student debt:

  • First, the debtor must not be able to both repay the student debt and maintain a minimum standard of living based on his or her current income and expenses.
  • Second, these financial difficulties must persist for a substantial portion of the student loan repayment period. Borrowers need to show exceptional circumstances such as a disability or the need to care for a dependant.
  • Third, the debtor must have made good faith efforts to repay his or her student loans. The court will look to see what legitimate actions the debtor took at least to attempt to repay his or her student loans.

For more information on proposed changes to bankruptcy laws and how they might affect you, contact a Kansas City bankruptcy lawyer at The Sader Law Firm.