Early last month, U.S. Representatives John Delaney and John Katko introduced legislation that would restore normal bankruptcy protections to student loans. The Discharge Student Loans in Bankruptcy Act (H.R. 2366) would treat student loans in bankruptcy like other unsecured debts. If this bill were to pass and be signed into law, it would be a major turnaround for thousands of borrowers struggling to pay back their student loans.
Opponents to this bill believe student loan borrowers would finish school with tens of thousands of dollars in debt and file bankruptcy after graduation. However, no research exists to support this argument.
There are some people who do not have the income or means to ever pay back their loans. These are the people who stand to benefit the most from the passage of H.R. 2366. Some student loan borrowers have balances that exceed the price of a new Lamborghini. For example, more than 346,000 Americans owe more than $200,000 in student loans. In one case reported on by the Washington Times, a Missouri high school teacher accrued $410,000 in higher education debt.
At the moment, there is no guarantee that bankruptcy courts would allow these borrowers to discharge their student loans. Borrowers would have to show that repayment of their student loans would impose undue hardship, which is up to the discretion of the court.
Can Student Loans Be Discharged in Bankruptcy?
It is not impossible to discharge student loans in bankruptcy, but it is more difficult than other types of debt. However, student loans were not always difficult to discharge.
In 1976, the U.S. Bankruptcy Code was modified to make it more difficult to discharge student loans. Almost three decades later, additional modifications to the bankruptcy code were made when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The BAPCPA requires bankruptcy filers with federal or private student loans to show that repayment of their higher education debts would create undue hardship.
Different courts have varying rules for showing undue hardship. In Missouri, courts use the totality of circumstances test. This test is more lenient than the Brunner test, which is used throughout most of the country. While the possibility of H.R. 2366 passing is an exciting prospect for borrowers, it does not mean is currently impossible to receive a discharge for student loans, especially for debtors filing in Missouri.
The Kansas City bankruptcy attorneys at The Sader Law Firm have a proven record of helping student loan borrowers manage debts. In one case reported on by Missouri Lawyers Weekly, bankruptcy attorney Neil Sader helped a client discharge $250,000 in student loans.