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Congress moves to change bankruptcy rules for student loans

Virginia residents who are burdened by overwhelming debt may seek relief by filing for bankruptcy, but student loans are generally not dischargeable under a Chapter 7 or Chapter 13 petition. However, that may soon change as a bill was introduced on May 9 that would eliminate the part of the bankruptcy code that makes federal and private student loan debt nondischargeable. The bicameral bill has bipartisan support.

Consumer advocacy groups including the National Consumer Law Center, Americans for Financial Reform, and the Center for Responsible Lending were quick to praise the legislative effort, but others said that the bill, while well-intentioned, would do more harm to students and taxpayers than good. A representative from the Consumer Bankers Association said that, if passed, the bill would lead to more student loans being discharged and higher interest rates on new loans.

The introduction of the bill comes at a time when concerns about student debt levels are growing. The total amount of outstanding student loans is expected to rise to $2 trillion by 2022, which is more than the amount Americans owe on car loans or credit cards. According to data from the Institute for College Access and Success, students graduating from college in 2018 started their working lives owing an average of $33,310 in student loans.

While discharging student loan obligations under a personal bankruptcy under current laws is difficult, it is not impossible. Attorneys with experience in Chapter 7 and Chapter 13 bankruptcy cases could explain to individuals burdened with student loans the kind of situations where a judge may consider their educational debt an undue hardship, which is currently the only available remedy.

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