In today's tough economic climate, more people than ever are resorting to filing for bankruptcy, unable to climb out from under a mountain of debt. In the United States, individuals can file for either chapter 7 bankruptcy or chapter 13 bankruptcy, depending on their circumstances. Chapter 7 bankruptcy is traditional bankruptcy where a person's assets are liquidated in order to pay off as many bills as possible. After that, the remaining debts are discharged. Chapter 13 bankruptcy allows an individual to reorganize their debt and formulate a payment plan. Chapter 13 bankruptcy is usually for people who have steady employment and are able to make regular payments to a bankruptcy trustee. Almost all kinds of debts can be discharged by either chapter 7 or chapter 13 bankruptcy. The two major exceptions are federal income taxes and student loans. Student loans are notorious hard to discharge, but help may be on the horizon if democratic lawmakers have their way.
In the 1970s, many student borrowers discovered a loophole in the U.S. Bankruptcy Code. After having graduated from college and owing thousands of dollars in student loans, some people, who had secured employment post-graduation, filed for bankruptcy in order to have their student loans discharged. Credit reporting and scores were not as important in those days as they are now so many times, this loophole effectively absolved these new graduates of any debt without any major financial ramifications. However, in the late 1990s and in 2005, the bankruptcy laws were changed in order to close this loophole and to stop people from abusing the system. These new laws made it virtually impossible for bankruptcy courts to discharge student loans. According to the bankruptcy laws that were enacted, the borrower must prove to the courts that repaying a student loan would create an extreme hardship on their lives. The criteria to meet this standard are very stringent, so much so that many bankruptcy lawyers will not even consider cases dealing with bankruptcy due to student loan debt. In fact, according to a study done in 2008, out of 72000 people who tried to have their student loans discharged, only 29 succeeded.
New bills introduced in early 2010 in both the United States House of Representatives and the United States Senate aim to change current bankruptcy laws to make it easier to discharge private student loan debt. Under these proposed amendments to the U.S. Bankruptcy Code, private student loans would be reclassified as private consumer loans. These renamed debts could be treated like other private debts such as credit card debt or bank loans and be eligible for discharge in bankruptcy court. However, federal student loan debts would still remain exempt from bankruptcy discharge under this new system. The goal of this bill is to help people burdened by private student loans to get a new start after bankruptcy. Proponents of the bill say that the new bill is in the spirit of the purpose of filing for bankruptcy, while opponents counter that the new bill unfairly targets private lenders, which will make it tougher for deserving students to acquire loans in the future.
As of the present, student loans of all types are not eligible for dismissal in bankruptcy court. However, all this may change in the near future, helping millions of people to escape their debts and start new.
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By an Act of Congress and the President of the United States, we are a federal Debt Relief Agency. Attorneys and/or law firms promoted through this Web site are also federally designated Debt Relief Agencies. They help people file for relief under the U.S. Bankruptcy Code. Disclosures Required Under the U.S. Bankruptcy Code.
If you live in Alabama, Florida, Missouri, New York or Wyoming, please click here for additional information.
By an Act of Congress and the President of the United States, we are a federal Debt Relief Agency. Attorneys and/or law firms promoted through this Web site are also federally designated Debt Relief Agencies. They help people file for relief under the U.S. Bankruptcy Code. Disclosures Required Under the U.S. Bankruptcy Code.