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Congress Poised to Consider Allowing Bankruptcy Discharge of Student Loans

Student Loans

For the most part, student loan debt is specifically excluded from being discharged in bankruptcy, along with certain tax debts, child support and more than a dozen other types of debts. Yet student loan debt is increasingly becoming a huge source of debt for more and more people. Recently, the Institute for College Access and Success reported that 69% of students in the 2013 graduating class left college carrying an average of $28,400 in student loan debt per graduate. Young people starting out in professional life have a hard time establishing themselves with this burdensome debt on their shoulders. Is it fair to exclude student loan debt from bankruptcy, increasing the financial hardship for the thousands of young Americans who represent our future? One Congressional lawmaker doesn’t think so.

Representative John Delaney, D-Md, has recently introduced H.R. 449, popularly known as the Discharge Student Loans in Bankruptcy Act. This law would amend the section of the law listing nondischargeable debts, 11 U.S.C. 523, by removing paragraph (a)(8) which currently prohibits student loan debts from being discharged. Representative Delaney believes his proposal promotes “basic fairness in the law.” As he says, “It doesn’t make sense for students with heavy debt burdens to be worse than someone with credit card, auto loan debt or mortgage debt.”

If this measure passes, student loan debt would be treated like any other unsecured debt, meaning it could be reduced or discharged through a Chapter 7 straight bankruptcy or a Chapter 13 debt adjustment plan. The bill was introduced into the House on January 21st, where it was referred to the Committee on the Judiciary.

Student Loans Can Actually be Discharged Under Current Law

A close reading of current law shows that student loan debt actually can be discharged in bankruptcy under current law. This exception to the exception applies where it can be shown that requiring the repayment of the loan would create an undue hardship on the debtor. It should be pointed out, however, that this is actually a difficult challenge to meet. In most cases, an adversary proceeding against the lender would have to be filed in court as part of the bankruptcy. While this move could add complexity to your bankruptcy case, it is worth considering if your particular circumstances support it.

If student loan debt is only one of several types of debt burdening you, then a bankruptcy can still help by cancelling other debts and freeing up your disposable income so you can pay nondischargeable debts such as student loan payments. It is worth talking to a knowledgeable bankruptcy attorney to see if bankruptcy can improve your situation. In Glen Allen and surrounding areas, contact Farmer Legal for a free consultation or call us at (804) 325-1441.

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