Nowadays it is pretty common to attend college or university after graduating from high school. It is also common to apply for loans to help fund pricey post-secondary tuition, accommodation, and general living expenses. But what happens at the end of your educational career? Most students graduate with thousands of dollars worth of debt and few are lucky enough to land a high-paying job straight away. Claiming bankruptcy is nobody’s first choice, but if you are stuck in a difficult financial situation you may contemplate filing under Chapter 7 of the US Bankruptcy Code. If so, you should know about the recent amendment to the Code: the Private Student Loan Bankruptcy Fairness Act of 2010.
In the past, education loans were not considered dischargeable debt in bankruptcy unless the debtor could prove ‘undue hardship’. This was extremely difficult to do because according to the Brunner Test, you needed to show that you could not maintain a minimum standard of living if you repaid the loan, your financial situation was not going to change in the near future, and you had made honest attempts to repay the loan. There were attempts to change the case of private student loans but members of Congress were not willing to reopen the US Bankruptcy Code. Finally, on 15 September 2010, the House of Congress passed the Private Student Loan Bankruptcy Fairness Act of 2010 that had been proposed by Congressmen Steve Cohen and Danny Davis five months earlier.
This bill was designed to create a level playing field between student borrowers and other borrowers by helping those in financial distress and offering everyone the same consumer protections. This means that any private loans given for the purpose of funding an education can now be discharged under Chapter 7. It does not change the fact that any private loans that are offered through state loan agencies cannot be discharged and must still be repaid.
The distinction between private and federally funded loans is an important one as they are two very different types of products. Private loans do not have caps on their interest rates, their rates are not fixed, and loans must be repaid by either the recipient or the co-signer regardless of illness, disability, or death of the debtor. These are circumstances that would normally void federal loans; therefore, it has been concluded that they should operate under a different set of rules in the US Bankruptcy Code.
Filing bankruptcy comes with many negative consequences, including making it hard to get a job, rent or buy property, or get future credit. It will stay on your financial record for up to 10 years and, as such, should be considered very carefully. Thankfully, most qualified bankruptcy attorneys offer free initial consultations and will explain the personal bankruptcy process in detail, as well as how the Private Student Loan Bankruptcy Fairness Act applies to your personal financial situation.
For more information on claiming bankruptcy and to be connected with a reputable bankruptcy attorney in your area, consider completing our free bankruptcy evaluation.