Could There Be Changes on the Horizon for How Student Loan Debt is Handled in Bankruptcy?

If you’re wondering how to file for bankruptcy for student loan debt or you’re wondering if bankruptcy can help you with student loans, read on to learn about upcoming changes to bankruptcy law that could help.

Those facing crushing student loan debt aren’t alone. Students and graduates across the country are dealing with five- and six-figure student loan balances that make it difficult for them to meet their obligations. A new provision to the US bankruptcy code could result in forgiveness through an expansion of the existing bankruptcy laws.

If passed, the Consumer Bankruptcy Reform Act of 2020 would result in a Chapter 10 provision that would treat student loan debt like other types of dischargeable consumer debt. People filing for Chapter 10 would have their student loan balance discharged by a bankruptcy judge.

The Chapter 10 provision is part of a larger measure introduced by Massachusetts Senator Elizabeth Warren and New York Representative Jerrold Nadler.

Bankruptcy Isn’t Always the Best Solution

Financial experts urge people considering bankruptcy to make sure they understand the pros and cons. If passed, the new provisions would allow for student loan debt to be discharged. However, this doesn’t mean you’ll be on financial easy street.

The same drawbacks that come with filing for bankruptcy for any reason still exist when you file for bankruptcy due to student loan debt. Even those who support changes to the existing laws point out that bankruptcy should always be a last resort.

But they also point out that the recent health pandemic and other financial concerns faced by Americans have pushed many toward bankruptcy. The Department of Education ordered a suspension of collection activities during the pandemic, but many of these restrictions are expiring.

In addition to discharging student loan debt in bankruptcy, the bill would allow borrowers to set up payment plans to deal with credit card debt, medical expenses, auto loans, and mortgages. Debtors would also receive further protection regarding their homes and vehicles.

It’s understandable why people have mixed feelings about the proposal. Many believe it would be great to offer a “bailout” to the little guy via bankruptcy law expansion. If large corporations are receiving assistance from the government, individual citizens deserve similar support.

Others believe that forgiveness or discharge of student loan debt just because they can’t afford it. Most people understand the obligation they’re taking on when they secure a loan. There are efforts underway to better educate student borrowers before they commit to tens of thousands of dollars in loans that are relatively easy to secure. For many, the idea of just dismissing the responsibility to repay the debt seems absurd.

How to File Bankruptcy for Student Loan Debt

In the meantime, while we wait to see how lawmakers handle changes to the bankruptcy code, you have options if student debts are dragging you down. Many opt for loan consolidation or arrange a deferment of their student loan payments until their financial situation improves.

Another option is to explore filing for bankruptcy. Without the expansion of existing laws, your student loan debt is unlikely to be discharged when you file. However, it would free up money to put toward your loan payments each month. If you file for Chapter 13, you might be able to build your loan into your repayment plan.

If you’d like to discuss the possibility of filing for bankruptcy or you want someone to assess your financial situation, we can help. Contact the Law Office of Robert M. Geller at 813-254-5696 to schedule a free consultation.