Many former students experiencing financial difficulties must choose between paying for basic living expenses (such as food and rent) and their student loans. They commonly defer their payments to avoid default, but this does not prevent interest from accruing on the loan and increasing the overall balance. As such, the eventual payments become too much to handle, and they consider bankruptcy. Unfortunately, the bankruptcy code offers little relief because student loans fall under the status of non-dischargeable debt, which cannot be cancelled through bankruptcy absent a showing of “undue hardship.” This is especially the case with private student loans.

Essentially, debtors seeking bankruptcy relief must satisfy each prong of the Brunner test (named after Brunner v. New York State Higher Education Services Corp.) They must show that they cannot maintain a minimum standard of living while paying their student loans, that their poor financial situation is likely to continue, and that they have made good faith efforts to repay their loans.

This is a very difficult legal standard to satisfy, so many unemployed Americans saddled with massive student loans do not escape from the penalties and interest that have accrued.

New Bills Aimed at Helping Struggling Student Loan Debtors

However, this may change. Senators Dick Durbin (D-IL), Sheldon Whitehouse (D-RI), and Al Franken (D-MN) introduced the Fairness for Struggling Students Act of 2011. Meanwhile, Congressmen Steve Cohen (D-TN), Danny Davis (D-IL) and George Miller (D-CA) and John Conyers (D-MI) introduced Private Student Loan Bankruptcy Fairness Act of 2011 in the House of Representatives. The proposed legislation would reclassify private educational loans as unsecured consumer debt, which would enable them to be discharged like credit cards, car loans and other types of privately issued debt. This was the case before the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted in 2005.

Proponents believe that the time has come for banks to be more accountable in the student loan market, especially considering the profits made through exorbitant penalties and interest. With the possibility of risky loans being discharged in bankruptcy, banks would be less likely to make risky loans, or to bind impressionable students into such harsh terms. forced to make pragmatic decisions about such loans.

As Congress takes its summer break, it remains to be seen whether the bills will be voted on when the session begins in the fall.

Source: Private Student Loans Get Bankruptcy Protection With Proposed Legislation