Since 2005, both federally financed and private student loans have been immune from discharge in bankruptcy, giving lenders a certain degree of confidence. However, the growing problem of borrowers defaulting on their student loans and the sheer size of the total amount Americans owe may signal a future change to bankruptcy law which may have massive repercussions for lenders across the country. If you’re in the lending industry, it may be important to monitor developments in case law and federal regulations.

Preparing for Changes in Bankruptcy Law

The Scale of Student Loan Debt

American college graduates collectively owe more than $1.5 trillion in student loan debt, second only to mortgages. Because most struggling borrowers are unable to discharge these debts in bankruptcy, many have no choice but to default on their accounts, which can have serious long-term consequences, both for themselves and the larger economy. Due to the severity and increasing frequency of these financial challenges, courts and legislators are looking for ways to offer these borrowers relief.

Discharging Debts in Special Circumstances

The bankruptcy code only allows bankruptcy borrowers to discharge student loans if they can prove that paying them back would present an undue hardship. Currently, establishing undue hardship is notoriously difficult, with only a small percentage of borrowers able to discharge their loans. However, because these cases are becoming so common, courts in some jurisdictions are exercising discretion or attempting to amend the rules. For instance, they may work around bankruptcy law by granting a partial discharge of late fees and interest, putting borrowers on income-based repayment plans, or using looser definitions of “undue hardship.” These developments may indicate a future movement to amend the bankruptcy laws again, making student loans eligible for discharge.
 

For over 45 years, Hackworth, Ferguson & Thompson has provided dedicated legal guidance to lenders and other businesses throughout southeast Missouri. With their background in corporate and bankruptcy law, they offer expertise across a broad range of practice areas, allowing them to help in a variety of difficult situations. Visit their website for an overview of their services, follow their Facebook for more tips and updates, or call (573) 223-4247 to schedule a consultation.