Portland Bankruptcy Law Group

As of June 2010, for the first time the total amount of U.S. student loan debt exceeded total credit card debt. This partly reflects a historic decrease in credit card debt, which peaked about two years earlier. People are being more cautious about using their plastic, and credit card companies have been much more cautious about extending credit while cutting off credit for their ongoing customers.

But, while credit card debt has been creeping downward, student loan debt has been streaking upward. Out of a total of $830 billion in student loan debt, about $300 billion of that amount was signed up for in just the last four years.

What to do if you have too big a share of those billions in student loans? In our last blog we said that writing off student loans in a bankruptcy is very hard to do. We said that you can write off, or legally “discharge,” student loans only if you can show that making the payments would cause you an extreme hardship. The law calls it “undue hardship,” but the courts have interpreted those two words very strictly.

Specifically, to discharge student loans you need to meet each of these three separate conditions:

1^st, show that if you had to make the payments on the student loan, you would not be able to maintain even a minimal standard of living under your current income and expenses. The budgets generally used for this are extremely tight.

2^nd, give evidence that this extreme difficulty in repaying the student loan would likely stretch out over most of that loan’s repayment period. Since repayment periods often still have twenty years or more to go, any medical or employment situation that is not permanent is not usually enough to meet this condition.

3^rd, establish that you have made a meaningful effort at repaying the loan, or at least have sought to qualify for appropriate forbearances, consolidations, and administrative payment-reduction programs. In particular, you must have applied for a payment-reduction program beforehand, or this condition is usually not met.

Portland Bankruptcy Law Group has the experience and knowledge to handle your case. Our bankruptcy lawyers are extremely familiar with and are well versed in all aspects of bankruptcy law. Contact us today!

Congress and the courts have over the years generally made it harder and harder for you to write off (“discharge”) student loans in bankruptcy. Most debts, such as credit cards, medical bills, old utilities and back rent, can be written off, or “discharged,” when you file a bankruptcy.  But government-backed student loans almost never can. These can only be discharged if you prove extreme hardship, which is very hard to do. Most people don’t qualify. And it costs so much to try that in most cases the risk of not succeeding usually makes the attempt not worthwhile.

A few years ago Congress amended the bankruptcy laws in lots of major ways, mostly making it harder to file a bankruptcy and limiting the benefit to doing so. One of the amendments was to make private student loans just as difficult to discharge as government-backed ones. Overall, these private student loans make up only about 20% of all student loans, but that’s still about $170 billion. For many people it can amount to tens of thousands of dollars of student loan debt.

But then earlier this year some small steps were taken in the opposite direction. Bills were introduced in each of the houses of Congress which would again allow some private student loans (those not guaranteed by the state or federal government) to be discharged like most other debt, just like they used to be. The proposed bills are the Fairness for Struggling Students Act in the Senate, and the Private Loan Bankruptcy Fairness Act in the House of Representatives.

Here is what one of the sponsors of the House bill said in introducing the bill a few months ago:

Federal student loans offer certain protections to minimize the risk that a financially distressed debtor will need bankruptcy relief, whereas private student loans are not required to have, and often do not have, such consumer protections. For example, Federal loans have fixed interest rates, whereas private loans often have variable rates that can be as high as 19 percent. Unlike Federal loans, private loans have no limits on origination fees, which can be as high as 9.9 percent, with lenders often charging additional fees such as late fees or fees for any deferments or forbearance, and half of the private loans in one survey had no forbearance option at all. Federal loans also provide flexible options for distressed debtors, such as income-based repayment plans and partial or complete loan forgiveness in some circumstances, whereas private lenders are not required to offer such options. For these reasons, private loans should be dischargeable in bankruptcy.

Before the election a House subcommittees held a vote on its bill and passed it, sending it to the full judiciary committee for a vote. Unfortunately, it is now not likely that either of these bills will become law. But we will continue monitoring this to see what happens, so that we can use it for our clients if it does.

Portland Bankruptcy Law Group has the experience and knowledge to handle your case. Our bankruptcy lawyers are extremely familiar with and are well versed in all aspects of bankruptcy law. Contact us today!