American Bankruptcy Institute’s Recommendation For Student Loans In Bankruptcy

Dischargeability of Student Loans


The American Bankruptcy Institute recently released their final report on consumer bankruptcy. This report took place from 2017-2019 and analyzed dozens of issues as they relate to Chapter seven and Chapter 13 bankruptcy. The first issue that I would like to address is the non-dischargeability in general of student loans. As the law currently stands, student loans or any loans for an educational purpose are deemed to be non-dischargeable.  This is the case unless a debtor can successfully bring an adversarial complaint proving that the student loan imposes an undue hardship on the debtor and thus should be dischargeable. Because those actions are few and far between, the reality is that student loans remain overwhelmingly non-dischargeable.

The Seven Year Payback Threshold


Prior to the 1998 Bankruptcy Code Amendment, student loans were dischargeable provided that they were in repayment status for more than seven years from when they first became due. The theory here was that if the student loan could not be paid back within that seven-year timeframe, then the debtor did not benefit from the student loan and did not have the ability to repay the student loan. The commission found that returning to the seven year rule balances out the need for a fresh start while preventing someone from immediately filing bankruptcy to eliminate student loan debt.

Governmental v. Private Student Loans


The commission also recommended that there be a distinction between governmental student loans and private student loans. While the seven year protection would apply to governmental student loans, there would be no such protection for private student loans. The theory here is that private student loans are given out based on lending criteria where interest rates are in accordance with risk.

Priority Status In Chapter 13


Lastly, the commission recommended that student loan debt be allowed to be considered a priority classification under Chapter 13. This will allow a chapter 13 debtor to repay student loans as a priority allowing for a greater percentage of repayment as opposed to general unsecured debt. As the law currently stands, student loans are lumped in with other unsecured debt making repayment of the student loans very difficult within the timeframe of a chapter 13. This leaves debtors with an overwhelming amount of student loan debt after the completion of the chapter 13. By allowing student loans to become a priority, they can be paid at a higher repayment percentage as opposed to general unsecured creditors. I believe that the commission had a great handle on student loans as it relates to chapter Chapter 7 and Chapter 13 bankruptcy and I strongly concur with their recommendation. The Congress would be wise to take the recommendation of the commission in implementing the specific recommended changes as it relates to student loans and their dischargeability and non-dischargeability in bankruptcy.

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