Student Loan Bankruptcy - It Isn’t as Easy as You Think

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Student Loan Bankruptcy Crisis

Student loan bankruptcy may no longer be a viable alternative for graduates or non grads that have become financially insolvent. Prior, to 1998, graduates and non graduates, of a higher educational institution, under federal United States law, were permitted, with certain restrictions, to include federal, state and private lending institutions financial aid as part of a personal debt repudiation. Then, in late 1998, an extremely dramatic change was made to, Title 11 of the United States Code, the federal financial insolvency codes.

The debt insolvency codes of 1998 declared that federal educational financial aid would be non dischargeable when petitioning for debt resolution. In 2005, Congress again amended Title 11 of the United States Code, and made educational financial aid from private lending institutions a non discharged debt. Thus making a full debt repudiation of educational financial aid practically non existent.

It should be noted however that the United States Congress provided a small measure of protection. The borrowers would be able to file a petition, with the insolvency courts, to prove that an undue hardship would be caused by failure to have the educational financial aid discharged or partially discharged. Some of these standards to help determine undue hardship are:

1.Unable to maintain a minimum standard of living for the borrower and his family.

2.Conditions that exist would not improve over an extended period of time.

When the borrower, of financial education aid, does not have a undue hardship, it is possible that the debtor will be able to eliminate other debts with his petition for debtor insolvency. Consequentially enabling the borrower to have more disposable income to help resolve the education financial crisis.

In addition, to the above relief, it has been found that some federal insolvency courts are allowing the debtors to reclassify, the educational financial aid, during a Chapter 13 filing. Thus enabling the debtor, to pay a greater portion of his or her income, to the educational financial aid in lieu of reducing unsecured debt. Furthermore the recent changes in Title 11 of the United States Code which restrict the amount of take home pay that can be garnished to 10% for repayment of educational financial aid.

Student loan bankruptcy, is indeed in a crisis, as it will no longer be the debt reduction that it was in the past.