Aug 13, 2012

School Loans and Bankruptcy: Beneficial Changes Coming?

Aug 13, 2012 - Bankruptcy by |

School loans and bankruptcy are becoming an increasingly hot topic not only amongst the former students struggling to pay for their education, but also amongst politicians.

Unfortunately, even with the best student loan lawyer, the majority of school loans are not dischargeable through bankruptcy proceedings. However, beneficial changes may be on the horizon in the future, enabling not only an increased effectiveness for student loan relief programs, but also a full discharge of certain school loans in bankruptcy.

President Obama Urges Congress to Increase Allowances for Bankruptcy and School Loans

According to this article from the Wall Street Journal, the Obama administration has backed a recommendation to allow for the discharge of private lender school loans in bankruptcy proceedings.

Currently, there is about $150 billion of privately backed school loans outstanding in the country, accounting for about 15% of the total outstanding educational debt held by former students. The remaining vast majority comes from the federal government, and even with this new proposal, those government loans would not have their status changed.

Still, this would be a major step forward to allow for former students to get back on sound financial footing, whereas in the past, student loan lawyers didn’t always have great recourse for their clients.

Student Loans and Bankruptcy Today

Despite recommendations for consolidating or removing debt, and various student loan relief programs, a student loan lawyer can’t get something discharged which isn’t dischargeable. In the case of school loans and bankruptcy today, they are only eligible for discharge in the case of “undue hardship”, which is more difficult to substantiate that you may like.

Undue hardship essentially means you cannot afford to pay for both a minimal standard of living, and your student loans. In conjunction with that, you have to prove that your financial situation isn’t likely to improve in the future.

This means that Chapter 7 bankruptcy has very little application for student loans. Chapter 13 bankruptcy however may provide benefits for those struggling with educational debt.

The debt still won’t be discharged, however, in a Chapter 13 filing, you create a structured repayment plan over a 3- or 5-year window. The amount you owe all of your creditors, including school loans, would be divvied up, which could reduce your monthly burden. This would then leave you with much fewer obligations in the future, allowing you to focus solely on the school loans.

If you’re considering your options for school loans and bankruptcy, then you should seek out the assistance of a student loan lawyer who will be able to guide you through the process.

Call the Law Offices of Brandon Bernstein, LLC, at 240.395.1418, and we’ll help you determine the best course of action.

Hopefully there are some great changes coming in the future for school loans and bankruptcy, and in the meantime, we can take up your cause as a student loan lawyer and help you get back on the right track.


The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice. Read our full disclosure here.