A little history about the student loan bankruptcy ban

On behalf of The Rollins Law Firm posted in Debt Relief on Monday, March 30, 2015.

Bankruptcy provides serious debt relief for people who are struggling with large credit card balances, underwater mortgages, defaulted car loans, unpaid medical expenses and many other types of secured and unsecured debt. People can eliminate all of these through bankruptcy, but not student loan debt.

It is a well-known fact that former students in Mississippi and across the nation are struggling with overwhelming student loan debt their salaries simply cannot cover. Unless debtors can prove they would face an undue hardship, which is a very high burden, student loan debt is generally not dischargeable through bankruptcy.

This was not always the case.

Prior to 1976, bankruptcy law and courts considered student loans as just another type of debt that was not secured by property that could be repossessed and sold to satisfy the debt. It was dischargeable through bankruptcy.

When the number of student loans in default began to increase, Congress passed a law prohibiting elimination of federal student debt for a period of five years after origination. They intended for the law to protect the financial investment the government was making in these students.

Consumer advocates argue that this fear of federal loss was a bit unfounded, citing a 1977 study conducted by the General Accounting Office as support. The study showed that the government was not losing a large investment due to bankruptcy filings. Few debtors actually exercised their right to have their student debt discharged, accounting for only 1 percent of the total number of mature loans.

In 1990, lawmakers tightened restrictions even more and increased the prohibitory period from five years to seven. Then, only eight years later lawmakers amended the rule once again. It was this last amendment that eliminated any waiting period. In 2005, lawmakers extended the ban on student debt discharge to cover private student loans.

Today, consumer advocates continue to push back against these laws, especially as the need for student debt relief continues to increase.

Source: Consumerist, “You Can’t Discharge Your Student Loans In Bankruptcy Because Of Panicked 1970s Legislation,” Ashlee Kieler, March 17, 2015

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