Although there are currently some methods to discharge student debt with a federal bankruptcy case, the fact remains that bankruptcy courts rarely receive requests to discharge student loans and even more rarely grant them. According to a recent Forbes report, the Department of Education has been putting considerable effort into defending the current laws governing student debt in bankruptcies.
The Department of Education is the largest single holder of student loan debt and is likely putting so much effort into supporting the current laws because these laws are extremely favorable to holders of student loan debt. When compared to other types of debt, even potentially questionable debts like unpaid taxes, gambling losses, or unpaid child support, student loan debt continues to be one of the most difficult types of debt to discharge in bankruptcy.
Debtors With Student Loan Debt Must Be Cautious of Debt Relief Agencies that Offer Loan Rehabilitation
The Forbes report includes an interview with a student loan activist and advocate, Alan Collinge. Mr. Collinge cautions that some “debt relief agencies” and “debt counselors” have been distributing overly optimistic information concerning the likelihood of student loans being discharged in bankruptcy as a method to attract clients with student loan debt in default. The predatory companies that concern Mr. Collinge attract clients with promises of discharging student debt through bankruptcy, but they have no real intention of guiding their clients through bankruptcy.
Instead of helping their clients with a bankruptcy, these agencies will instead pressure debtors into a “loan rehabilitation,” which often results in more financial woes for the debtor. A loan rehabilitation is an arrangement in which the debtor gets out of default by making approximately one year of payments to the agency, after which the agency repackages the student loans into a new, larger debt that is sold on the open market or back to the federal government. These repackaged loans are not any easier to discharge in a bankruptcy than the original student loans, and the year of payments that the agency collected from the arrangement is not applied to the debt total. As a result, the debtor is usually left with more debt than before, and fewer resources to address it, while the “debt relief agency” gets a commission check for arranging the rehabilitation. According to the article, over 60% of these rehabilitated loans result in the debtor’s default, often for a far larger amount than the original debt would have been.
Congress May Resolve the Student Debt Discharge Crisis, but Until Then Debtors Must be Cautious and Seek Honest Legal Advice for Debt Relief
The article notes that the U.S. Congress has been considering three bills that would make more student debt eligible through discharge in a bankruptcy, although it is difficult to predict if or when any new legislation will be signed into law and go into effect. As long as the present laws are on the books, debtors with significant student debt must be careful not to fall into a trap that results in a loan rehabilitation and more financial problems in the future.
It is difficult, but not impossible, for debtors to discharge their student loans through a bankruptcy, and a skilled bankruptcy attorney is almost always needed to decide the best course of action. Debtors should be wary of debt relief agencies, debt coaches, or credit counselors that discuss the ease of discharging student debt but do not actually handle bankruptcies.
Do You Have Financial Troubles?
If you are struggling with debt, whether it includes student loans or not, the Louisville and Southern Indiana bankruptcy attorneys at the Schwartz Bankruptcy Law Center can give you honest advice and representation to help solve your financial woes. Our attorneys can answer your questions about what kinds of debt can be discharged in a bankruptcy, and what realistic alternatives may exist to resolve your debts. Contact an honest and experienced debt relief attorney today and see if bankruptcy is right for you. At the Schwartz Bankruptcy Law Center, we can help you get back on the right track. Call 866-366-3328 to schedule a risk-free consultation or contact us through our website.
More Blog Posts:
Seventh Circuit Court of Appeals Affirms Lower Rulings Denying Discharge of Student Loan Debt, Kentucky Bankruptcy Lawyers Blog, published August 1, 2015.
How Entrepreneurs Build Successful Businesses After Discharging Debts with Personal Bankruptcy, Kentucky Bankruptcy Lawyers Blog, published October 8, 2015.