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Student Loan Forgiveness through Bankruptcy

More than 40 million Americans have student loans averaging $28,000 of debt which collectively total over $1.3 trillion.  Because of the heavy student loan burden, the White House is considering allowing Americans to obtain student loan forgiveness through bankruptcy, something the National Association of Consumer Bankruptcy Attorneys and federal lawmakers having been considering for a number of years.

On March 10, 2015, a White House Memorandum to the Secretary of the Treasury, the Secretary of Education, the Consumer Financial Protection Bureau, and others announces a “Student Aid Bill of Rights to Help Ensure Affordable Loan Repayment”.

The memo states that the White House will use executive action to implement the proposed Student Aid Bill of Rights.  It gives the Secretary of Education until July 15, 2015 to “issue information highlighting factors the courts have used in their determination of undue hardship, to assist parties who must determine whether to contest an undue hardship discharge in bankruptcy of a federal student loan.”

The memorandum also gives the Secretary of the Treasury, the Secretary of Education, and the Director of the Consumer Financial Protection Bureau until October 1, 2015, to report “recommendations for statutory or regulatory changes in this area, including, where appropriate, strong servicing standards, flexible repayment opportunities for all student loan borrowers, and changes to bankruptcy laws.”

Ed Boltz, president of the National Association of Consumer Bankruptcy Attorneys (NACBA) responds, “We’re glad they’re making this a priority and hope Congress does also,” according to the Wall Street Journal.

A 2012 NACBA survey to bankruptcy attorneys across the United States revealed that 82% of these attorneys stated it was a “big problem” trying to help clients get a fresh start through bankruptcy because of the difficulty of discharging student loan debts.

Current federal law prevents bankruptcy judges from allowing discharge of student loan debts, whether federal or private, unless extreme financial hardship exists.

Student loan debt has increased substantially since federal law was changed to prevent the discharge of student loan debts.  Back in 2006, student loan borrowers filing for bankruptcy protection had $13,456 in student loan debt.  By 2013, student loan borrowers filing for bankruptcy protection had $32,096 in student loan debt, according to the Wall Street Journal.

In short, it is unclear whether Obama’s executive order will eventually lead to student loan forgiveness through bankruptcy for the 40 million Americans burdened by student loan debt.

Contact a Bankruptcy Attorney

The Bankruptcy Attorney at PEARSON BUTLER Law will keep abreast of changes in bankruptcy law and how it affects student loan forgiveness.  To contact an experienced bankruptcy lawyer in Utah, call (801) 495-4104.

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