Can Student Loans Be Liquidated? 4 questions answered

For decades, student loans have been largely prohibited from being repaid through bankruptcy proceedings. That could change underneath NEW START through bankruptcy law. Here, public policy scholars Brent Evans and Matthew Patrick Shaw, both from Vanderbilt University, explain why student loan debt can not usually be settled through bankruptcy and how this can be changed if the proposed bill becomes law..

Why can’t people get rid of student loans through bankruptcy now?

Although it is not impossible, liquidating student loans in case of bankruptcy is difficult. Due to law of 1976, student loans are not treated in bankruptcy proceedings like other forms of debt, such as credit card debt or car loans. This policy stems from a Federal Bankruptcy Law Commission, who heard testimony claiming that easy repayment of student loans in the event of bankruptcy could undermine federal student loan programs. Congress was worried that students might borrow thousands of dollars from the federal government, graduate, file for bankruptcy to pay off their student loans and never pay off their education debt.

In an extension of Law on Higher Education of 1965Congress voted in favor law 1976, which made borrowers wait five years after the first student loan payment was paid before they could repay the loan due to bankruptcy. Congress created an exception that allowed the exemption within that five-year period if the loan caused “unjustified difficulties.”

Congress extended the five-year bankruptcy ban to seven years 1990. Congress then extended it to the life of the borrower 1998.

At present, getting rid of “unjustified difficulties” is the only way to pay off student loans in the event of bankruptcy – this is a much higher limit than many other common forms of debt. This upper limit includes both federal student loans and, since then 2005most forms of private student loans.

Were there not cases where people were still getting rid of their student loans through bankruptcy?

Absolutely. Although it is difficult, it is still possible to repay student loans due to bankruptcy, covering the unjustified difficulty requirement. A 2011 study found that only 1 in 1,000 student loan borrowers declared bankruptcy they even tried to repay their student loans. However, those who succeeded succeeded at a rate of 40%.

Article 523 of the Bankruptcy Code does not specify a specific test to determine what constitutes unjustified discomfort. Federal courts are divided over what should be the appropriate standard for clearing student loan debt. The case of the second circuit, Brunner v. New York State Higher Education Services Corporationset out three requirements that determine whether unjustified difficulties apply.

First, the borrower must prove that if he is forced to repay the student loans, he will not be able to meet a minimum standard of living based on income and bills.

Second, the borrower must not be able to repay a “significant part of the repayment period”.

Third, they must have made good faith efforts to repay the student loan.

If a bankruptcy court agrees that a borrower meets these three conditions, the court can repay the student loan debt.

But the bankruptcy courts in Eighth circuit (in the Upper Midwest) – and occasional courts in First circuit (in Puerto Rico and parts of New England) – dismiss Brunner and consider “all the circumstances”.

For example, the 2003 case In re Long states that a borrower can meet the requirement of unjustified difficulties in a different way than Brunner. The borrower must prove that he can not meet a minimum standard of living given the financial resources, necessary living expenses and other circumstances.

This test is considered less difficult for Brunner to take because it does not require the borrower to prove “certainty of despair” or “total incapacity”.

Explain the proposed law to allow bankruptcy for student loans

If enacted, the bipartisan NEW START through bankruptcy law would change the current law to abolish the lifelong ban on student loan exemption in the event of bankruptcy and replace it with a 10-year ban.

Under the proposed law, if borrowers can prove that the repayment of their student loans caused unjustified difficulties during the first 10 years, then they can get rid of it after the end of this 10-year period without having to prove that it would be unjustified difficulty from this. pointing forward.

This change will only apply to federal student loans, not private student loans. Any exemption from private student loans, regardless of the repayment schedule, would still require proof of unjustified difficulties.

To shoulder part of the financial costs for the federal government of this proposed change, the bill also includes an accountability measure for colleges and universities. Schools will have to repay to the government a portion (either 50%, 30% or 20%) of the repayment amount of the student loan, depending on the default rate and the institution’s repayment rate at the time the first payment is made loan.

Would going bankrupt be an attractive way to get rid of student loans?

Bankruptcy is not an ideal option for dealing with student loans because it has significant immediate and long-term consequences. The immediate consequence is that bankruptcy can lead to the sale of real estate to pay off debts. The long-term consequence is that, depending on the type, Chapter 7 or 13, bankruptcy remains on credit reports for seven to 10 years. A significant negative score on credit reports means that it will be more difficult to get a credit card, car loan and mortgage. When any form of credit is received, the interest rates are likely to be much higher with bankruptcy recorded.

Another solution to a large student loan debt is to sign up for one income-based repayment plansuch as Revised Pay As You Earn. These programs limit the amount of the monthly payment for federal student loans to a percentage of you optional incomewhich is the difference between your income and 150% of the state poverty guideline, adjusted for family size.

After 20 years of repayment for undergraduate loans (only 10 years if the borrower is in a public service position), the remaining balance is forgiven. If the new bill becomes law, borrowers in income-based repayment plans will have a choice. They can either seek bankruptcy after 10 years and suffer the consequences, or continue to pay by writing off a loan.

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