Obama Pushes the Discharge of Student Loans in Bankruptcy

As you may know, students loans are nearly impossible to discharge in bankruptcy. In order for a bankruptcy court to grant a discharge, the debtor has to convince a judge that the payment of the student loan debt presents an undue hardship to him or her and related dependents. This requirement means that virtually most debtors do not even attempt to discharge student loans.

Well those days may be coming to an end. In a Wall Street Journal article, the president of the united states is pushing the idea of changing the laws to allow the discharge of student loans in bankruptcy. The president is asking for an investigation of the impact of allowing student loans to be included in a standard bankruptcy discharge. This idea faces stiff competition from the lenders and their supporters. Understandably, lenders would not be quick to give up their highly favorable carve out that could potentially eat into profits.

Private student loan lenders have being more aggressive int he last couple of years, filing judgments and garnishments against borrowers to enforce their rights. The prospect that a bankruptcy filing would extinguish thousands or ten of thousands of debt could stop these aggressive collection tactics on their heels.

In my experience so far, I was able to discharge one student loan and in that case the debtor clearly could use the relief. The debtor had significant medical issues and the lender upon verification of medical conditions did not oppose our complaint. Most debtors face a much tougher road that can be expensive to undertake under the current laws. A change would allow more deserving debtors to seek relief from burdensome student loan debt.

Senators Durbin and Warren have urged the department of education to issue a directive to its attorneys as to when they can oppose complaints for dischargeability of students loans as well as announced intent to introduce legislation to treat private student loans the same way any other private debt in a press release that can be found here. Combined with the president these voices present an opportunity to fix a broken system, but the president is a lame duck and Democrats are in the minority. As a result, I am not entirely hopeful these efforts will go anywhere anytime soon.