Forgiving Student Loans in Bankruptcy

Tulsa Bankruptcy: What Not to Do Before Filing

Student Loan debt is becoming a crippling problem in recent times. In fact forgiving student loans is a hot topic as the number of borrowers skyrockets.  Student loan borrowers may have more Bankruptcy Options in Oklahoma than they realize. Sluggish economic growth and an uneven economic recovery have made for tough economic times for borrowers.  These economic challenges can be daunting for those with a significant student loan debt. 

Bankruptcy Options

While forgiving student loans in bankruptcy is presumptively impossible, the common belief is that the “undue hardship” standard for obtaining student loan forgiveness is so difficult that few people qualify.  Despite the exacting standard for forgiving student loans, there are bankruptcy options available to debtors with student loans.  Further, Congress is currently considering the Fairness for Struggling Students Act of 2013, which would further expand the options available to college students and recent graduates struggling with enormous debt loads.

Pending Legislation

This pending legislation that was reintroduced in January 2013 would Forgiving Student Loans distinguish private for profit student loans and make them subject to bankruptcy discharge.  While student loans provided by the government generally have been non-dischargeable for many years, private student loans only obtained this status in 2005.  The sponsors of the proposed legislation have indicated that the fact student indebtedness has reached the trillion dollar level is a key impetus for the change.   The sponsors of the bill also argue that there is no good justification for the special protection provided to private student loans, which is not extended to other types of for profit private consumer debt.

News About Student Loans in Bankruptcy 

While this legislation is still pending, there is more good news for students facing staggering student loans.  While the general wisdom is that the undue hardship test that must be satisfied to discharge student loans is so difficult to satisfy that few students try. This may be true but a new study reveals that forty percent of those that attempt to file for bankruptcy against student loans are successful in discharging some or all of their loan balances.

Moreover, the same empirical study revealed that approximately 69,000 debtors that were good candidates for full or partial relief did not file.  According to the author of the study, “99.9 percent of student loan debtors in bankruptcy never attempt to get a discharge.”  According to the author of the study, approximately one-tenth of one percent of those with student loans that file for bankruptcy attempt to discharge their student loan obligations.

Undue Hardship Student Loans

The study found that those who were successful in satisfying the undue hardship test and obtaining at least a partial discharge of their student loans shared the following characteristics:

  • Increased probability of medical hardship

  • Lower likelihood of obtaining employment

  • More likely to have lower annual incomes the year proceeding their filing

The undue hardship test requires the following showing to discharge student loans:

  • Current inability to repay the loans

  • Future inability to repay the debts

  • A good faith effort to repay the loans

The author of the study suggests that the premise that student loans are not dischargeable is an urban myth but based on a number of factors.   The general belief that student loans are virtually impossible to discharge is widespread despite this recent research to the contrary.  Further, student loan debt collection agencies and the media perpetrate the idea that there is no reason to attempt to discharge student loans because success is nearly impossible.  The researcher behind the study also indicates that even many attorneys believe that it is not worth trying to discharge student loans.

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