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Changes proposed in bankruptcy laws for student loans

| Jul 24, 2018 | Chapter 7 Bankruptcy

In April, Oregon congressman Peter DeFazio introduced an act that would make it less difficult for people to discharge student loans in bankruptcy. These types of loans are presently not dischargeable in most cases although in a few cases, people have successfully done so. “Undue hardship” is the standard by which it is decided whether a student loan debt is dischargeable, and the proposed act would broaden that definition.

While there is no set standard for what constitutes undue hardship and this is decided on a case-by-case basis by the courts, in general, people need to prove an inability to support themselves and their family and that their financial situation is unlikely to improve over the next several years. Although around 40 percent of people struggling with student loan debt who include it in their bankruptcy filing get it discharged or reduced, fewer than 1 percent even attempt to do so because it is perceived as so difficult to get a discharge.

Opponents of changing the requirements argue that people could abuse the system and take out loans they have no intention of repaying. However, supporters say that debtors are presently left with few options to deal with overwhelming student loan debt. People who are struggling with student loans may want to see if they can get their loans deferred by the borrower.

Whether or not a person is able to discharge student loan debts in bankruptcy, filing for bankruptcy may free up money to pay off student loans. With a Chapter 7 bankruptcy, most debts can be discharged, and a person is also permitted to keep certain essential assets. Filing for bankruptcy can be a way to get a fresh start, and although it reduces a person’s credit score in the short run, over the next few years, the person can rebuild that credit.

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The Law Office of Kim Covington is a debt relief agency, and I have helped families, individuals and small businesses, file for bankruptcy relief under the U.S. Bankruptcy Code, for over 19 years.