New Law Offers Student Loan Discharge During Bankruptcy

Discharge Student Loans in Bankruptcy Act could spell big relief for borrowers.

Student loans drain money

If you have student loans, you’re probably no stranger to the burden these loans create for millions of Americans. Student loan debt is now the second leading source of debt in the U.S. after mortgages. It’s a $1.3 trillion problem that incredibly tough on student loan borrowers. What’s more, it’s made even more difficult by the fact that student loan discharge during bankruptcy is almost impossible to achieve.

However, a new law proposed by Rep. John Delaney (D-Md.) may change that. The Discharge Student Loans in Bankruptcy Act would allow borrowers to qualify for student loan discharge during bankruptcy filings. Under the current system student loans courts rarely discharge student loans, even when they’re private.

Rep. Delaney says this law is important because student loan debt drags down the U.S. economy and keeps families from achieving the American Dream.

“While student loan debt is a complex problem that will require many solutions – increased support for grant programs, efforts to increase affordability, improved consumer education and transparency – we also need to reform our bankruptcy laws to help those with the absolute greatest need.”

How student loan bankruptcy discharge works now

Few people qualify for student loan discharge during bankruptcy under the current system. Current laws protect both federal and private student loans from discharge, which has left millions of borrowers stuck.

There is an avenue that allows people to discharge student loans during a personal bankruptcy filing. You must prove undue financial hardship, which is not exactly easy to prove during a filing. You can’t just show it’s tough to pay back your loans – that applies to pretty much anyone with student loan debt. Instead, you must to prove that your loans are what drove you into bankruptcy and would do so again.

“Few people qualify for student loan discharge under the current system,” explains Gary Herman, President of Consolidated Credit. “As a result, you can go through personal bankruptcy to regain stability, but still have student loans draining your income. It leaves many borrowers feeling trapped with no way out.”

Where the Discharge Student Loans in Bankruptcy of 2017 stands now

Rep. Delany just introduced this law on May 4 and referred it to the House Judiciary Committee. It would have to go through the committee first and then if it passes it would go to the House floor and proceed from there.

“Even if Congress moved quickly it would likely be the end of the year before they would sign it into law,” Herman continues. “There is also a matter of cost and the impact that widespread discharge would have on the economy. If you currently face challenges with student loan debt, you shouldn’t wait on this new law; you need to find a solution now.”

Herman encourages distressed student loan borrowers to explore federal programs that already exist. There are a range of federal repayment plans available, including 3 programs for borrowers facing financial hardship. Some programs can reduce your monthly payments to as low as 10% of your income; this make it much easier to pay off your debt. You may also qualify for Public Service Loan Forgiveness (PSLF).

To learn more about student loan debt elimination, visit Consolidated Credit’s free Guide to Student Loan Consolidation.