Private Student Loans may be dischargeable in Chapter 7

[Stl49]

This just in....


Send to a Friend
Printer Friendly Version
Send Letter to the Editor

Written by: Michelle Cormier
Published: 09/16/2010
House Panel Approves Bill to Allow Discharge of Private Loans in Bankruptcy

On Wednesday, a panel of the House of Representatives Judiciary Committee approved a bill that would allow borrowers to discharge private student loans in bankruptcy.

The legislation, which has been offered in several preceding congressional sessions, would restore provisions previously included in the bankruptcy code. In 2005, Congress voted to amend federal bankruptcy law to make private student loans unforgiveable debt in bankruptcy unless a borrower is able to demonstrate that loan repayment would be an "undue hardship."

According to the Chronicle of Higher Education, the bill faces long odds for a final passage. Many Republicans oppose the measure, warning that it would drive up interest rates and further shrink the market for private loans. Additionally, the congressional legislative session has only four weeks before the House's target date to adjourn.

[KeithDoxen]

My guess is that the Democrats will pass this bill during the lame duck session that follows November's election.

[biotechsolution]

Never will pass the Senate.

[backtoschool]

I agree with biotechsolution. I don't think this bill has a chance of passing in the Senate.

[KeithDoxen]

There will be a lot of PO'd former senators this fall after the election who are about to be sent home. They'll have nothing to lose, and my guess is many of them will view this as the right thing to do.

[kartoons19]

Well good luck if it passes. I have federal loans, so I'm stuck with them. At least they have some programs to help out with payments.

[currerbell]

Is there ANY possible way I can avail myself of this - or set myself up to do so if it passes? I am already filed and past 341, discharge should come on Oct 25. My loans are listed. Do you think an AP would take this into account?

[KeithDoxen]

Is there ANY possible way I can avail myself of this - or set myself up to do so if it passes? I am already filed and past 341, discharge should come on Oct 25. My loans are listed. Do you think an AP would take this into account?

We don't know what the text of the final bill will be exactly, given that it has to go to the full Judiciary Committee, the full House, and the Senate, all of which could add amendments and change the language. BUT what we do know is that right now, the bill expressly states that only cases commenced on or after the day the bill becomes law will be subject to the new law. In other words, if you file the day before Obama signs this bill into law, you're out of luck.

You could dismiss your case and then file again once it becomes law. But it's a gamble, because what if it doesn't go through? It's a judgment call at this point I guess. I was discharged last December and my private loans are in default. I'm going to hope they don't sue me until either the SOL runs out, or if this is signed into law, until I am eligible to file again.

[currerbell]

Yeah - my first impulse was to dismiss and refile. But I can't realistically do that. I wonder, though, what courts will do with APs filed AFTER the enactment of such a bill. I know the "right" to discharge wouldn't apply, but could courts still reasonably apply Brunner in light of such a clear expression of congressional intent?

[KeithDoxen]

Yeah - my first impulse was to dismiss and refile. But I can't realistically do that. I wonder, though, what courts will do with APs filed AFTER the enactment of such a bill. I know the "right" to discharge wouldn't apply, but could courts still reasonably apply Brunner in light of such a clear expression of congressional intent?

It sure as heck is worth a try.

[currerbell]

I don't know why I vacillate on this when I *know* I am going to end up filing the dang AP. This passing would just make it all the more certain. But I think I could very reasonably argue that while the laws in effect at the time of my filing compel me to seek discharge via AP, Brunner is only the judiciary's attempt to determine legislative intent of "undue hardship," and that the passage of such a bill clearly shows that Congress intends a broader application of the term and effectively abrogates the unduly strict application dictated by the Court in Brunner. It isn't the greatest argument, but I've heard much worse.

[KeithDoxen]

I don't know why I vacillate on this when I *know* I am going to end up filing the dang AP. This passing would just make it all the more certain. But I think I could very reasonably argue that while the laws in effect at the time of my filing compel me to seek discharge via AP, Brunner is only the judiciary's attempt to determine legislative intent of "undue hardship," and that the passage of such a bill clearly shows that Congress intends a broader application of the term and effectively abrogates the unduly strict application dictated by the Court in Brunner. It isn't the greatest argument, but I've heard much worse.

I don't think that's the best argument to use, given that the undue hardship jurisprudence is going to stay in place for federal student loans. It's not that Congress is broadening the undue hardship exception. It's that Congress is narrowing the types of debt to which that exception applies, and is putting private student loans back into the realm of regular, everyday unsecured debt, that is dischargeable in bankruptcy. What you're essentially telling the court is that because of this law, if you had just waited another six months to file, a ton of debt that wasn't dischargeable before would have been dischargeable, and so you're essentially getting shafted. Of course, putting that in the form of a legal argument is the challenge.

[currerbell]

Well, yeah, you are correct - I forgot about the fed loans. Perhaps an argument that the new law compels the court to apply a different standard in APs heard after the passage so that all plaintiffs can avail themselves of the right without having to wait and file a second bankruptcy JUST to do so? And that it is contrary to public policy to force people to file BK a second time just to avail themselves of this single relief? I don't know. I'll have to noodle some more.

[KeithDoxen]

Well, yeah, you are correct - I forgot about the fed loans. Perhaps an argument that the new law compels the court to apply a different standard in APs heard after the passage so that all plaintiffs can avail themselves of the right without having to wait and file a second bankruptcy JUST to do so? And that it is contrary to public policy to force people to file BK a second time just to avail themselves of this single relief? I don't know. I'll have to noodle some more.

I think the public policy argument is probably the way to go. Maybe draw out your argument some more, but yeah, you're on the right track I think.

Incidentally, when would I be able to file again if this passes? My Ch 7 was successfully discharged last December. If this bill passes, I would not be eligible for a 7 based on my monthly expenses and all but could easily file a 13 and in so doing would end up paying down only a fraction of my private student loan debt. Maybe as little as 10 percent. And of course I could use that as a negotiation to convince them to settle with me. But what's the minimum amount of time between a 7 and a 13? I seem to remember reading that at least four years must have passed, but I could be wrong.

[lrprn]

Given that the chance of this bill passing both the House and Senate before the midterms is about the same as a meteor hitting your house or apartment today, making *ANY* decisions related to this proposed bill for your bk planning is a gigantic risk, and frankly, just plain wishful thinking. DON'T DO IT.