Bankruptcy and Student Loans: Demonstrating Hopelessness
Brandon, FL (Law Firm Newswire) November 1, 2012 - It may sound like an exercise in despair to publicly declare one's financial situation hopeless, but that is just what some people are doing in an attempt to rid themselves of stifling student loans.
“Bankruptcy protection affords many people a measure of relief,” said O. Reginald Osenton, a Brandon bankruptcy attorney. “Student loan debt is usually not forgiven, but for truly desperate situations, there are strategies to consider.”
Filing for bankruptcy protection can go a long way toward allowing a fresh start for those who find themselves in dire financial straits, but under ordinary circumstances, it does not result in student loan obligations being discharged.
Until 1976, debtors filing for bankruptcy were able to have their student loans discharged, along with most of their other debts. But that year, Congress changed the law in response to reports that recent graduates with advanced degrees were filing for bankruptcy, as a matter of deliberate strategy. Congress subsequently strengthened the law in 1990 and 1998 in order to protect public funds. For-profit student loan providers soon sought the same protection for their loans, and in 2005, they persuaded Congress to extend the extend the law to cover their loan portfolios.
Federal bankruptcy law allows for forgiveness of student debt, only in cases where repayment would cause “undue hardship” and when the debtor's financial situation presents a “certainty of hopelessness.” But these standards have never been defined by Congress, and so bankruptcy judges must do it themselves. Thus, judges are forced to make predictions about a debtor's future earning potential, a particularly difficult task.
Statistics on undue hardship cases are scarce, but they appear to be less than 1,000 per year, a small fraction of the number of debtors in default on their student loans. One reason so few people attempt to discharge their student loans is that it requires legal appeals, completely separate from normal bankruptcy.
“Even when student loans cannot be discharged, bankruptcy can help a borrower get back on his feet,” Mr. Osenton added. “Those who find their debts unmanageable should consult with an experienced bankruptcy attorney.”
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