Congress Considers Laws Extending Bankruptcy Relief To Struggling Students

Last updated on June 17, 2020

The Federal Reserve recently released a report showing that Americans owe over 470 billion dollars in federal student loans. Unfortunately, many financial experts predict that this number is deceivingly low and estimate the actual federal student loan debt to be closer to 840 billion dollars. They argue the discrepancy is due to the fact that the report does not include federal loans issued by borrowers other than the Department of Education.

This massive amount of debt is connected to continued tuition increases during tough economic times. Parents and students are struggling to pay their bills and find it difficult to add education costs into the mix. As a result, more and more people looking to fund these educational opportunities are applying for aid.

Unfortunately, many students and parents are struggling to repay these loans after completing school and receiving their degrees. Although bankruptcy court once was able to offer relief for student loans issued by private lenders, laws were passed in 2005 taking away these protections. Currently, Congress is considering multiple bills that would reinstate these protections.

Bankruptcy and student loans

Bankruptcy is a process designed to offer the person filing with a fresh start. Once filed, a bankruptcy petition generally results in the issuance of an automatic stay. An automatic stay is a court order that requires creditors to stop pursuing payment for any owed debts.

Initially, government issued student loans were protected from bankruptcy, but private loans were not. In 2005 changes to the bankruptcy code resulted in the removal of private issued student loans from debts that could be discharged in bankruptcy. As a result, students who funded their education with private loans were unable to receive bankruptcy protections.

In response to the growing educational debt facing Americans, legislators are proposing new pieces of legislation, including the Private Student Loan Bankruptcy Fairness Act. If passed, this law would allow educational loans from private lenders to be discharged in bankruptcy.

Legislators in support of the bill argue that students should be encouraged to pursue educational opportunities. The ability to discharge this debt in bankruptcy would allow these students the protection of a safety net if their finances suffer due to layoffs or other unforeseeable life events.

The bill is currently under consideration, but is only one among many that proposes to extend the reach of bankruptcy relief to educational loans.

If you or a loved one is struggling to pay bills, bankruptcy may provide an option for a fresh start. Contact an experienced bankruptcy law attorney to discuss your situation and help you decide if bankruptcy is the right option for you.