Borrowers With Student Loans Face Limited Options in Bankruptcy

Prolonged, elevated unemployment and underemployment rates have left many people unable to meet their existing financial obligations. Instead of paying down debts and saving money, those with little or no income are forced to accumulate debt and deplete any savings they may have.

Over time this becomes unsustainable, and for some with significant debts, bankruptcy may be the best option. However, as many young borrowers have learned, not all debts are treated equally in bankruptcy proceedings.

Whereas credit card debt and car loans may be fully dischargeable in bankruptcy court, this is not true for student loans. Students may accumulate upwards of $100,000 in debt, but barring grievous bodily injury or serious disability, it is nearly impossible to discharge these loans in bankruptcy.

Two Views on Discharge of Student Debt in Bankruptcy

Why the disparate treatment between student loans and other forms of debt? Those favoring this specialized treatment argue that the bankruptcy restrictions allow private loan companies to provide loans to riskier borrowers.

Young people seeking student loans rarely have much credit history. Loan companies are trusting that eventually these students will be able to repay the loans, despite the fact that at the time the loans are made the borrowers often have very limited income. If the lenders had less certainty regarding repayment, they may be less inclined to make loans that students need to finance education.

In contrast, opponents of this specialized treatment argue that it places young borrowers in a precarious financial position. Initially, students are pushed to take out significant loans to pay for school; educational institutions can raise tuition, because students can simply take on more loans.

Once students have graduated though, many are unable to find employment that will allow them to meet the repayment schedule. As borrowers fall behind, the lenders may tack on fees or increase interest rates, making repayment more difficult. Lenders have little incentive to work with borrowers, as the borrowers have no realistic bankruptcy protections for these loans.

Earlier this year lawmakers in both the House of Representatives and the Senate proposed legislation that would eliminate these specialized protections for private lenders. Under the proposed law, private student loans would be eligible for discharge under the same terms as other unsecured loans. Unfortunately for student borrowers, the proposed legislation made little progress in Congress.

For more information regarding student loan debt and bankruptcy, speak with a knowledgeable Texas bankruptcy attorney. Although a borrower may have difficulty discharging student loan debts, bankruptcy may help an individual borrower eliminate other debts and build a strong financial future.