Borrowers of private student loans got a big surprise in 2005 when it became much more difficult to discharge delinquent private student loans by filing for bankruptcy. In making it more difficult for the majority of private student loan borrowers to file for bankruptcy, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Judith Benderson, Office of Legal Programs and Policy, Executive Office for United States Attorneys, stated that the redrafting of bankruptcy laws in the 1990’s “evolved into something of a Christmas tree.”
Which Laws Prevent Student Debt Discharge?
Before 1978, private student loans were discharged in bankruptcy easily by claiming an exception. Prior to 1984, according to FinAid, only “private student loans made by a nonprofit institution of higher education” were able to earn an exception to bankruptcy restrictions. Then, in 1984, the Bankruptcy Amendments and Federal Judgeship Act exempted all private student loans from bankruptcy. Additional new laws and rules regarding student loans have gradually made it more difficult for students to escape their student loan debt, even those loans obtained from private lenders.
New proposed legislation may wipe out at least some of the difficulties in getting private student loans discharged in bankruptcy. The idea gained considerable momentum, but an earlier version of the bill, H.R. 532, the Private Student Loan Bankruptcy Fairness Act of 2013, introduced by Representative Steve Cohen (D-Tennessee) failed. The latest bill, H.R. 1674, Private Student Loan Bankruptcy Act of 2015, again introduced by Rep. Steve Cohen, went to committee in March 2015. This time, 39 co-sponsors of the bill joined Representative Cohen in presenting the proposed legislation. The latest data, according to GovTrack, is that the prognosis for the bill indicates a “0% chance of being enacted.”
Private Vs Federal Student Loans Bankruptcy Procedures
A major problem encountered by borrowers of private student loans in the 2005 legislation is that both federal and private student loans were lumped into one category. Opponents of the 2005 legislation may point to differences in private versus federal student loans as a reason why they should not be lumped together.
Federal student loan programs do not take into account a student’s credit history or the ability to repay the loans. Private lenders, on the other hand, choose whether to provide the loan or not, just like in other credit application situations. Borrowers of private student loans must meet the strict lending criteria for loan approval and then do not have the several resources available for repayment that most borrowers of federal student loans often have available. Income-based repayment plans, wiping out a percentage of student loan debt if the borrower accepts employment as an educator in certain school districts or certain other employment fields are just some examples of beneficial advantages that borrowers of federal student loans have available that borrowers of private student loans do not have available.
Will Congress Change Its Tune?
Even though Congress seemingly beat back Representative Cohen and the 39 co-sponsors of the Private Student Loan Bankruptcy Fairness Act once again, the fact that the bill was reintroduced and sent to committee may indicate that Congress is softening on the proposed legislation.
Are you eligible to discharge your private student loan by filing for bankruptcy? Contacting an attorney with comprehensive experience in bankruptcy law may help you get the answers you need.