New Proposal Would Ease Requirements for Discharging Student Loans in Bankruptcy
Lawmakers in Washington D.C. have devoted a fair amount of attention to the overwhelming burden of college debt carried by college students and graduates who face a difficult economy and ever rising college tuition expenses. The media reports of university graduates carrying tens of thousands and even hundreds of thousands of dollars in debt while living in their parents’ basements have become commonplace. Student loans are so difficult to discharge in bankruptcy that filers are rarely successful.
Because medical bankruptcy also is common, a current proposed bankruptcy solution might provide relief for many student debtors. The proposed legislation is referred to as the Medical Bankruptcy Fairness Act of 2014 (S. 2471). The legislation introduced in the Senate by Sen. Sheldon Whitehouse would permit debtors to discharge student debt if they spent a minimum of $10,000 on medical bills or have accrued at least that much in medical debt. If this proposal becomes law, debtors in this category will be considered “medically distressed”. This is a much more liberal standard than the “certainty of hopelessness” that the loans could never be repaid.
A recent article published in the Wall Street Journal suggests that nearly half of all student debtors have sufficient medical debt to discharge their student loans under this proposal’s standard. The article indicated that the average amount of medical debt carried by those with student loans amounted to an average of $8,595.00. Further, almost one in three people who file for bankruptcy relief who have unrepaid student loans also have medical debt. The article also indicates that approximately 171,000 people that filed for bankruptcy in 2013 could have had their student loans discharged under this proposal.
Although the proposal faces an uphill battle to become law, this represents another sign of the momentum toward making bankruptcy a more viable option for those struggling with student loans that they cannot repay. Many people do not realize that private student loans only began to receive the same treatment as government student loans in 2005. Many advocates of bankruptcy reform argue that there is no legitimate justification for granting financial institutions that provide private student loans preferential treatment over other creditors. The Education Department has noted that the legislative history of the 2005 bankruptcy reforms provide no rationale for giving private student loans preference over other forms of unsecured obligations.
Under current bankruptcy law, student loans are only dischargeable if the debtor can satisfy the “undue hardship” test. This standard is so difficult to satisfy that many people assume that student loans can never be discharged in bankruptcy. There may be other ways bankruptcy can help those buried in educational debt, such as creating a Chapter 13 repayment plan to stretch out repayment of arrearages. However, it is so difficult to satisfy the undue hardship test that a Baltimore, MD bankruptcy judge recently made national headlines by discharging $340,000 in student loan obligations incurred by a debtor who was unable to work because of a medical disorder.
If you have questions about student loans that you are struggling to repay, our experienced Prince Georges County bankruptcy lawyers at Georgette Miller and Associates P.C. can evaluate your situation and advise you regarding your options. Please feel free to contact us today at 866-964-6529 to learn how we can help.