One of the things many student loan borrowers don’t realize when they sign on the dotted line and take money for school is the permanence and immutability of the debt. Historically, shaking either private or public student loan debt (without dying or paying it off in full) was virtually impossible. Unless you had a forgiveness program, the debt was there to stay. And with private student loans, even death isn’t always an escape from the debt…
But now a recently proposed law and landmark court case may change how student loans are evaluated in personal bankruptcy. The legislation (if it gains passage) will likely affect a wider swath of student loan debtors than the court case, but both are important in the evolution of dealing with the student loan crisis and getting borrowers out from under mountains of educational debt.
The Proposed Legislation: HR 532
The Private Student Loan Bankruptcy Fairness Act of 2013 is sponsored by Rep. Steve Cohen, a Tennessee Democrat, and was introduced in early February and is currently under review in committee in the House. There are 27 co-sponsors of the bill in the House – all Democrats. The bill proposes to lump private student loans in with any other kind of debt which would make it fully dischargeable in bankruptcy without the debtor having to prove “undue hardship” which is the current standard.
The bill would not impact federal loans. This is the fourth try for this bill but with increased scrutiny on the student loan crisis, perhaps its time has finally come. The House has 31 more Republicans than Dems, so unless some cross the aisle, this bill won’t pass. If it does make it out of the House, the Democratic majority in the Senate may usher it through to law. Fingers crossed. No wait – uncross your fingers and call your Representative – particularly if they’re a red and tell them to support HR 532!
The Court Case: Krieger v. Educational Credit Management
It’s typically an uphill battle to get student loans relieved in bankruptcy, but it can be done. But when you combine this with uber-aggro debt collection tactics of student loan creditors, it can be insurmountable. Such is the case with Ms. Krieger, the 53 year old plaintiff in this landmark case. The bankruptcy court allowed her private student loans to be included in her bankruptcy. The court classified her as poor, living in poverty with her mother in a rural area and unable to pay even $1 per year on her student loan balance.
But Education Credit Management (aka ECMC) fought back and asked a district court to exclude the student loans from Krieger’s bankruptcy because she did not meet the “undue hardship” requirement and had not enrolled in a 25 year repayment plan. The district court sided with ECMC but fortunately the Seventh Circuit Court of Appeals overturned the lower court because she had tried to pay down the loans, was living a “subsistence life” and had no prospects to improve her condition.
This ruling will likely only help those who are living in penury and there are applicability questions because the district court did not specify whether this verdict should be applied in a limited capacity. Even so, it’s a step in the right direction and we can only hope the courts will be more lenient in the future.
The Wrap Up
Only time will tell if either the legislation gains passage or the verdict gains traction as a precedent setting case. If HR 532 is made into law, the lawsuit will be moot, but if and until then we can hope for one or the other! Many students have a significant amount of private student loans that can be impacted by this proposed law and court ruling. Many students dig deeper into federal and private loans when poor credit prevents willing parents from pitching in to help finance their offspring’s college education.
Let’s hope unscrupulous private lenders at some point are called to account for predatory lending and collection tactics as exemplified in the Krieger case. This scrutiny is currently being applied to private lenders underwriting FHA mortgages, but perhaps the scope will be widened to student loan creditors as well!
If you have student loans, even if you are struggling to make payments and are considering bankruptcy, try Tuition.io’s free student loan tool to view and manage your loans, check out repayment options and contact your lenders. And here’s some related recent blogs from days and weeks past on similar topics we hope will inform you as you navigate the often turbulent student loan waters…