For those in California having difficulty repaying student loans, the new Federal Reserve Chairman is wondering why these loans are not dischargeable in a bankruptcy. However, this is a question only Congress can answer.
Many people are under the mistaken impression that federally guaranteed student loans can be forgiven in bankruptcy. This is not the case. Many years ago, Congress essentially eliminated student loan debt from discharge in a Chapter 7 liquidation case. Later, it added the no discharge rule to Chapter 13 repayment plans.
There is one exception to these rules. A discharge for these debts can be granted if the debtor shows undue hardship. However, “undue hardship” is a vague term, and courts have been reluctant to grant motions on these grounds.
Recently, the incoming Federal Reserve chair openly questioned why these rules are in place. He cited some startling figures. Nearly 40 million Americans have some form of student loan debt, amounting to an aggregate of $1.4 trillion. He also pointed out that those having difficulty in meeting their student loan obligations will suffer long term due to personal budget constraints and damaging credit ratings. Because of the long repayment terms for student loans, this financial difficulty can often follow a debtor for a large portion of his or her adult life.
For those suffering from student loan debt and additional debts, such as medical bills or credit card debt, bankruptcy may still be an option. If those debts are discharged, there is more room in the monthly budget to repay student loans. The exception to discharge does not prevent a bankruptcy; it only prevents certain debts from forgiveness.
An experienced bankruptcy attorney may analyze a debtor’s financial situation and explain which debts survive the bankruptcy. This information may give the debtor a better idea of their budget after bankruptcy in order to create a debt repayment plan.