New Legislation may Mean Changes for Private Student Loan Discharges
A new initiative by the Obama administration could ease the path to bankruptcy for borrowers of private student loans. As reported by Inside Higher Ed, the United States Department of Education (DOE) recently released information regarding the Student Aid Bill of Rights, a collection of proposals to help borrowers who are having trouble with their payments. One of the recommendations will ease restrictions on the discharge of private student loans during a bankruptcy proceeding. The proposed changes stem from a 2005 law, whereby Congress strengthened restrictions on the discharge of these debts.
According to the article, consumer advocates have been advocating for this change for years, but this is the first time that a presidential administration has promoted such an initiation. Secretary of Education Ted Mitchell is quoted in the article as stating, “All other types of consumer debt are dischargeable in bankruptcy and we think private student loans are a glaring exception.” He went on to say, “We feel strongly that while there are protections built into the [federal] direct loan program that are important for borrowers, there aren’t parallel protections for borrowers in the private student loan market. We think it’s important to do what we can to create those protections, and we think starting with a bankruptcy provision is the way to go.”
Getting a Private Student Loan Discharged
Under current bankruptcy laws, discharging a private student loan is a difficult chore. You must prove that the loan repayment is causing an undue hardship on your life, meaning that you are unable to provide basic necessities for yourself and your family due to your loan obligation.
When considering your request, the court generally looks at:
- The school you attended to include whether or not it is a traditional four year college; and
- The type of educational program offered. Private loans for technical and vocational programs are generally easier to get discharged.
Though the bankruptcy judge maintains a significant level of discretion in determining whether undue hardship applies to your situation, there are a few tests that courts generally use in their determination.
- The Brunner Test requires three conditions to be met:
- Poverty caused by the repayment;
- Whether the current situation is likely to continue throughout the repayment schedule; and
- Good faith efforts to repay the loan.
The Johnson Test evaluates five indicators, including:
- Your current employment and income, in addition to your future prospects for employment and income earnings;
- The level of education obtained;
- Your likelihood of staying healthy and employable;
- Your number of dependents and related expenses; and
- Good faith efforts to attempt repayment.
The Bryant Test
- This simple test only examines whether your current income level is at or below the federal poverty level.
All of these tests are viewed from a totality of circumstances perspective, so gather all of your financial documentation and secure the services of a bankruptcy attorney who can help you successfully present your case for discharge.
If your student loan debt is overwhelming and you are considering bankruptcy, contact Julia Kefalinos today for immediate assistance with your case. We serve clients in Miami, and are prepared to help you whenever you are ready.