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Bill would make student debts easier to discharge

The amount of student loan debt outstanding in Virginia and across the country is expected to grow to $2 trillion by the year 2022. This would be far more than the amount of auto loan or credit card debt, and experts believe a large percentage of the student debt will ultimately not be repaid. Student loan borrowers, though, have largely not had the option to discharge their debts in bankruptcy. A new bill might soon make it easier for them to do that.

The bankruptcy rules have changed a few times since the 1970s with effects on student loan discharge in bankruptcy. First, there was a requirement that student loan borrowers wait five years or more after they started repaying to declare bankruptcy. In 1990, the waiting period was increased to seven years. Late in the 1990s, the rule changed again, and borrowers have not been allowed since to discharge student loan debt unless they can demonstrate undue hardship.

The law has never explicitly said what constitutes undue hardship, and advocates and attorneys have said the uncertainty has led to unfairness. An expert on student debt said that lenders may be more willing to work with borrowers if the borrowers could discharge their loans via bankruptcy. He added that less than 1% of student debt was cancelled through bankruptcy when it was allowed.

There may be a spike in student loan bankruptcies if they become allowed; the student debt expert said there might be pent-up demand. People in Virginia who have steady income but who are struggling to pay their bills might consider a Chapter 13 bankruptcy, sometimes called a wage earner's bankruptcy, to restructure their debts. An attorney may be able to help by examining the facts of the situation and assisting in the drafting of a Chapter 13 repayment plan.

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