By Ryan C. Wood
Student loans are currently non-dischargeable in bankruptcy. What this means is that even if you file for bankruptcy you will still have to pay for your student loans after receiving a discharge in the bankruptcy case. They do not get wiped out along with all your other discharged unsecured debts. This rule applies to both federal subsidized and private student loans. See 11 U.S.C. §523(a)(8).
One form of limited relief from this strict rule is what is called the Brunner Test adopted by some of the circuit courts. This test was taken from Brunner v. New York State Higher Education Services, 831 F.2d 395 (2nd Circuit, 1987). The Brunner Test states that student loans will be dischargeable if (1) you cannot maintain, based on your current income and expenses, a minimal standard of living if you are forced to repay the student loans, (2) these circumstances are likely to continue for a significant portion of the repayment period for the student loans, and (3) you have made good faith efforts to repay the loans. The courts have taken a very strict approach when determining whether the student loans are discharged. This three prong Brunner Test is very hard to pass for most people. It is very frustrating as a bankruptcy lawyer to not be able to provide complete relief for people who really need it. That is includes the burden of educational loan debt they cannot afford.
On February 6, 2013, Tennessee Democratic Representative Steve Cohen introduced H.R. 532 in the House of Representatives. There are currently 29 other Democratic cosponsors for the bill. The bill is called the Private Student Loan Bankruptcy Fairness Act of 2013. This bill will essentially render private student loans dischargeable with all the other unsecured debts such as credit card debt, medical bills, personal loans, and payday loans. There is no need to prove undue hardship. This bill says nothing about the federal student loans though, so they will still be non-dischargeable in bankruptcy even if this bill passes. H.R. 532 will undo the changes that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 brought. Prior to BAPCPA, private student loans were dischargeable in bankruptcy along with all other general unsecured debts. Only federally subsidized student loans were non-dischargeable at that time.
The Private Student Loan Bankruptcy Fairness Act of 2013 could provide needed debt relief for people with huge student loan debts. Student loan debts are currently out of control and are a burden for many recent graduates that have a lot of debt and cannot find a job. H.R. 532 has currently been referred to the Subcommittee on Regulatory Reform, Commercial and Antitrust Law. If the bill makes it past the committee it will be presented for a vote in the House of Representatives. The House has more Republicans than Democrats so we would need some of these Republicans to vote for the bill in order to pass. If you support this bill I would highly recommend you contact your representatives to vote for the bill. Public pressure goes a long way.
If the Private Student Loan Bankruptcy Fairness Act of 2013 becomes the law of the land and you have a lot of private student loans to discharge, you should immediately contact an experienced bankruptcy attorney to help you discharge those student loans in your area.