Should private student loans be dischargeable in bankruptcy? The question may be simple, but the answer is far more complicated. When we examine educational borrowing in this country, we note two distinct issues: the ever-increasing cost of obtaining an education and the heightened burden that private loans put on student borrowers.
No Discharge of Private Student Loans in Bankruptcy
Did you know that the aggregate student loan obligation in this country now exceeds our combined credit card debt? According to the Federal Reserve Bank of New York, student loan debt reached $867 billion in the fourth quarter if 2011.
The Consumer Financial Protection Bureau’s (CFPB) student loan ombudsman, Rohit Chopra, puts the figure even higher. In CFPB’s official blog, Chopra puts that figure at $1 trillion. “Young consumers are shouldering much of the punishment in the form of substantial student-loan bills for doing exactly what they were told would be the key to a better life,” said Chopra. (The CFPB was created through passage of the Dodd-Frank Act of 2010 to educate the public on loan products and credit cards.)
Deliberate Student Loan Defaults a Myth
When BAPCPA passed, private student loans were added in with government loans and made exempt from discharge in bankruptcy. This is so regardless of whether the debtor files for relief under Chapter 7, Chapter 11, or Chapter 13 of the U.S. Bankruptcy Code. This occurred even though student loan borrowers were not in class of so-called financial abusers. Yet student borrowers were lumped in with dead-beat parents avoiding child support through bankruptcy, former spouses avoiding alimony payments through bankruptcy, convicted criminals seeking to escape criminal fines through bankruptcy, and those who to sought avoid paying their taxes through bankruptcy.
Putting an End to the Private Student Loan Exemption in Bankruptcy
U.S. Senator Dick Durbin (D-IL) wants things back the way they were before the Bankruptcy Abuse Prevention and Consumer Protect Act of 2005 (BAPCPA) was passed. BAPCPA made private loans non-dischargeable in bankruptcy, just like federally backed educational loans. He’s urging Congress to take action in passing the Fairness for Struggling Students Act, legislation that would drastically change how private educational loans are handled in bankruptcy. According to Durbin and many other Fairness supporters, when a borrower enters into an educational loan with a private lender and later suffers financial hardship, the private student loan should be dischargeable just like any other unsecured debt in bankruptcy.
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To give debt relief to struggling debtors, Durbin wants to eliminate the exception to discharge for private student loans that is currently in the U.S. Bankruptcy Code. As it stands today, no student loan of any kind, whether federally backed or privately loaned, will be discharged in bankruptcy unless the debtor proves that the loan imposes an undue hardship. As Phoenix bankruptcy attorneys know all too well, proving undue hardship is very difficult and most debtors will not succeed in getting the loan discharged.
We’ll continue this discussion in our next post on how private student loans were dischargeable in bankruptcy before passage of the BAPCPA in 2005.