As has been previously discussed on this website, 11 U.S.C. § 523 specifically exempts student loan debt from being discharged in bankruptcy unless the debtor can show that the student loan “would impose an undue hardship on the debtor and the debtor’s dependents”. Courts have interpreted this language as creating a very difficult burden for a Debtor to prove, and Bankruptcy Judges and courts are very reluctant to allow student loans to be discharged in bankruptcy.
Student loan debt in the U.S. is approximately $1.2 trillion, and 71 percent of college seniors had debt in 2012, with an average outstanding balance of $29,400 for those who borrowed to get a bachelor’s degree. It is estimated that 40 Million Americans have outstanding student loan debt.
Both the House and Senate have introduced legislation this session to either amend the bankruptcy code to allow for some forgiveness of student loans or to allow for debtors to more easily be able to refinance student loan debt. The “Bank on Students Emergency Loan Refinancing Act” (S.2432) introduced in the Senate in May would allow individuals with outstanding student loan debt to refinance at the lower interest rates currently offered to new borrowers. Also just recently introduced in the U.S. Senate is “The Medical Bankruptcy Fairness Act of 2014 (S. 2471). This bill would offer more accommodations in bankruptcy for individuals with large medical bills, who lose income due to an illness or injury or to care for a family member. It would also cover people who lose alimony or child support due to the medical condition of the person responsible to pay. One of the main accommodations in the legislation is that it would allow forgiveness of student loan debt to qualifying “Medical Debtors”. S. 2471 has been referred to the Senate Judiciary Committee.
The Consumer Financial Protection Bureau recently cited grievances that have emerged with more than 90 percent of private student loans being co-signed. Many of these types of loans have “auto default” provisions which allow the lender to place the loan in default if the co-signer dies or declares bankruptcy. These “auto defaults” force the borrower to immediately repay the loan balance even if the borrower is current with the payments. In response, Congress has introduced “The Bereaved Borrowers Bill of Rights Act of 2014” (H.R. 4643). The Bill would require loan companies to offer borrowers a reasonable time period (defined as a minimum of 90 days) following the death or bankruptcy of a cosigner to apply for cosigner release, identify a new cosigner, or refinance the loan before the company takes action to accelerate the loan or move it into default (while timely payment continues). It would also prohibit lenders from reporting an automatic default as a result of death or bankruptcy to credit reporting companies. The Bill has been referred to the House Committee on Financial Services.
Jonathan Bierfeld is an attorney with Martin Law Firm, P.L., whose practice focuses in Bankruptcy Law and Civil Litigation. He is admitted to practice law in the State of Florida and the Federal Court for the Middle District of Florida. He primarily practices in Lee County Florida in Cape Coral and Fort Myers, Florida.