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Fed chairman discusses student loans and bankruptcy

On Behalf of | Mar 7, 2018 | Chapter 13 Bankruptcy |

Virginia residents who have student loan debt are generally unable to discharge those obligations in bankruptcy. While there is a provision for discharging these types of debts if they cause “undue hardship”, this is a term that has never been clearly defined, and courts have traditionally set a very high standard for what it constitutes.

On March 1, the new Federal Reserve chairman, Jerome Powell, spoke to the Senate Committee on Banking, Housing, and Urban Affairs about the possibility of making student loans dischargeable in bankruptcy. Sen. Brian Schatz asked Powell whether student loan debt, which is carried by 40 million people and has reached $1.4 trillion, negatively affects the economy.

Powell said that he had no explanation for why student loans cannot be discharged in bankruptcy and that it could affect economic growth. Furthermore, he said that the inability to pay off student loans has a long-term negative affect on people’s economic lives.

Congress began passing laws restricting people’s ability to discharge student loans in the 1970s. Powell said that in his role, he could not make student loans dischargeable, but he said Congress could take a look at the issue. Other monetary policy makers, including former Federal Reserve chair Janet Yellen, have also expressed concern about rising student loan debts.

Although current bankruptcy laws generally do not allow these debts to be discharged, discharging other debts or restructuring payments might allow a person to pay off student loans with less difficulty. Restructuring debts to pay creditors over a period of three or five years is how a Chapter 13 bankruptcy works While declaring bankruptcy does affect a person’s credit, unpaid debt does as well. Bankruptcy can provide a fresh start and a chance to begin rebuilding credit.