For decades, student loans were largely prohibited from being repaid through bankruptcy procedures. It could have changed under FRESH START through Bankruptcy Law… Here, public policy researchers Brent Evans and Matthew Patrick Shaw, both from Vanderbilt University, explain why student loan debt usually cannot be paid off through bankruptcy and how that could change if the proposed bill becomes law.…
Why can’t people now get rid of student loans through bankruptcy?
Paying off student loans in the event of bankruptcy, while not impossible, is difficult. Because of 1976 lawstudent loans are not considered during bankruptcy proceedings like other forms of debt, such as credit card debt or car loans. This policy stems from Federal Bankruptcy Law Commission, which heard testimony alleging that easy repayment of student loans in the event of bankruptcy could undermine federal student loan programs. Congress was concerned that students could 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 extension Higher Education Act 1965Congress adopted 1976 Act, which forced borrowers to wait five years after the first student loan payment before they could repay the loan through bankruptcy. Congress created an exception to allow discharge during this five-year period if the loan caused “undue hardship.”
Excessive hardship tax exemptions are currently the only way to pay off student loans in the event of bankruptcy – a much higher threshold than many other common forms of debt. This higher threshold includes both federal student loans and, as 2005 yearMost forms of private student loans.
Weren’t there cases when people did get rid of their student loans as a result of bankruptcy?
Absolutely. Although difficult, but still possibility of student loan repayment through bankruptcy by fulfilling the requirement of unjustified deprivation. A 2011 study found that only 1 in 1000 student loan borrowers who filed for bankruptcy even tried to pay off their student loans. However, those who did it succeeded at a rate of 40%.
Section 523 of the Bankruptcy Code does not establish a specific test to determine what qualifies as undue difficulty. Federal courts are divided over what should be the appropriate standard for paying off student loans. Second circuit case, Brunner v. New York State Higher Education Services Corporation, established three requirements that determine whether unjustified deprivation is applied.
First, the borrower must demonstrate that if forced to repay student loans, he will not be able to maintain a minimum standard of living based on income and bills.
Second, the borrower must be unable to pay “a significant portion of the maturity.”
Third, they had to make a good faith effort to pay off the student loan.
If the bankruptcy court agrees that the borrower meets these three requirements, the court can pay off the student loan debt.
But the bankruptcy courts in Eighth circuit (in the Upper Midwest) – and sometimes courts in First circle (in Puerto Rico and parts of New England) – reject Brunner and investigate the “set of circumstances” instead.
For example, the 2003 case. In re Long states that the borrower can satisfy the undue hardship claim differently from Brunner. The borrower must prove that he cannot meet the minimum standard of living, taking into account financial resources, necessary living expenses and other circumstances.
This test is considered to be less difficult to perform than the Brunner test because it does not require the borrower to confirm “hopelessness” or “complete incapacity”.
Explain the proposed law allowing bankruptcy of student loans.
In the event of a bipartisan FRESH START through Bankruptcy Law will change the current law, removing the lifetime ban on the payment of student loans in bankruptcy and replacing it with a 10-year ban.
Under the proposed law, if borrowers can prove that repaying their student loans caused undue difficulty during the first 10 years, then they can receive repayment after that 10-year period without having to prove that it would be unduly difficult. point forward.
This change will only apply to federal student loans and not to private student loans. Any repayment of private student loans, regardless of maturity, will still require proof of undue difficulty.
To help the federal government shoulder some of the financial costs associated with this proposed change, the bill also includes an accountability measure for colleges and universities. Schools will be required to reimburse the government for a portion (50%, 30% or 20%) of the student loan paid, depending on the cohort default rate and the institution’s repayment rate at the time the first loan payment falls due.
Will bankruptcy be an attractive way to get rid of student loans?
Declaring bankruptcy is not ideal for dealing with student loans because it has significant immediate and long-term consequences. The immediate consequence of bankruptcy can be the sale of property to pay off debts. The longer term consequence is that, depending on the type, Chapter 7 or 13, bankruptcy remains on credit reports for seven to 10 years. A material negative rating on credit reports means it will be more difficult to get a credit card, car loan, or mortgage. When receiving a loan in any form interest rates are likely to be much higher with a bankruptcy record.
Another solution to the problem of large student loan debt is to sign up for income-driven repayment plan, Such as Revised pay as you earn… These plans limit the monthly payment on federal student loans to a percentage of your discretionary income, which is the difference between your income and 150% of the state’s estimated poverty level, adjusted for family size.
After 20 years of repayment of undergraduate loans (only 10 years if the borrower works in the public service), the remaining amount is forgiven. If the new bill becomes law, borrowers with income-driven repayment plans will have a choice. They can either file for bankruptcy after 10 years and incur losses, or they can continue to repay by forgiving the loan.
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