Bankruptcy and Student Loans


Personal bankruptcy basically allows people to undergo a financial reorganization supervised by a court. This allows debtors to fulfill financial obligations and then eventually make supervised, reasonably modest, payments over time.

This is true unless, however, someone’s debts are mostly student loans. It’s currently very difficult to discharge student loans (or back taxes, or child support). In order to avoid paying the often massive interest owed on student loans, someone must prove that paying back the money would “impose undue hardship.”

That may change. Yesterday Democratic congressmen introduced legislation that would,

[R]estore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt.

Before changes were made to the bankruptcy code in 2005, only government issued or guaranteed student loans were protected during bankruptcy. This protection has been in place since 1978 and was intended to safeguard federal investments in higher education. Today’s bill would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005, so that privately issued student loans will once again be dischargeable in bankruptcy.

Sen. Richard Durbin (D-IL), a sponsor of the legislation, has been proposing laws like this for years. Let’s see how far his efforts go this time.[Image via]

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Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer