New Laws and Court Rulings May Affect Bankruptcy and Student Loans

 Posted on August 16, 2021 in Student Loans

While borrowers have several options for receiving relief from their outstanding debts, student loans can often present difficulties, and a person may worry that they will be required to pay these debts, regardless of their ability to do so. In many cases, student loans cannot be discharged through bankruptcy unless a person is able to show that they have experienced “undue hardship.” However, this may be changing based on the potential passage of a new law, as well as a recent court ruling.

Bill Would Restore the Ability to Discharge Student Loans Through Bankruptcy

Prior to 1998, borrowers were allowed to file for bankruptcy and discharge federal student loans that were at least 10 years old, but following a change in the law, these loans can now only be discharged based on undue hardship. Currently, most people are unable to eliminate student loans that were obtained through government programs or backed by the federal government unless they can prove that repaying these loans would cause extreme financial difficulties that would affect their ability to provide for themselves. Meeting these standards can be difficult, and since few borrowers are able to discharge their student loans, many people are required to repay these debts throughout their entire lifetime.

A bill was recently introduced in the U.S. Senate that would address this issue. The Fresh Start Through Bankruptcy Act would restore the ability to discharge federal student loans after 10 years. If the law passes, borrowers who file for bankruptcy will be able to discharge student loan debts 10 years after the first payment on a loan was due. For loans that have been due for less than 10 years, the existing “undue hardship” standard will remain in effect. 

Court Ruling Addresses Private Student Loans

Another recent development may affect private student loans that are not issued or backed by the federal government. A court case in New York addressed student loans for a borrower who had filed for bankruptcy and received a discharge of his debts. However, following the discharge, the loan servicer sought repayment of the loans, claiming that bankruptcy laws prohibit the discharge of both federal and private student loans. An appeals court ruled that this law does not apply to private loans, and because of this ruling, more borrowers may be able to discharge these types of loans through bankruptcy.

Contact Our Kerrville Bankruptcy Attorney for Student Loans

If you are considering bankruptcy, you may be unsure about how to address student loans along with debts such as a home mortgage or auto loans. The Law Offices of Chance M. McGhee can advise you of your options, including helping you determine whether alternatives to bankruptcy may be available. To arrange a free consultation and get legal help with debt relief, contact our Boerne bankruptcy lawyer at 210-342-3400.

Sources:

https://www.forbes.com/sites/zackfriedman/2021/08/12/student-loan-cancellation-through-bankruptcy-more-likely-than-wide-scale-student-loan-forgiveness-if-congress-passes-this-new-bill/?sh=5b33e9327b5b

https://www.reuters.com/legal/transactional/private-student-loans-can-be-tossed-bankruptcy-appeals-court-rules-2021-07-15/