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What you need to know about the proposed student loan bankruptcy law

| Jul 24, 2020 | Bankruptcy

Personal bankruptcy can eliminate or reduce many types of debts. But generally, student loans are among them. Bankruptcy law makes it very difficult to cancel student loans, except in cases where the debtor is experiencing severe financial hardship.

Because student loan debts burden millions of Americans for years after they graduate college, Congress has considered making it easier to include those debts in Chapter 7 and Chapter 13 bankruptcy. The most recent example is a bill that seeks to tie student loans and bankruptcy law to the economic recession triggered by the COVID-19 pandemic.

Details of the bill

Called the COVID-19 Student 5 Loan Relief Act of 2020, the bill would allow you to discharge your student loans in bankruptcy, if you meet one of the following qualifications:

  • Your income was reduced due to the pandemic
  • The primary income earner in your family died of the coronavirus
  • You have become permanently disabled due to COVID-19

By “reduced,” the bill means specific levels of reduction based on your pre-pandemic income, specifically:

  • At least 20 percent reduction for individuals with an annual income of less than $75,000
  • At least 30 percent reduction for individuals with an annual income between $75,000 and $125,000
  • At least 40 percent reduction for individuals with an annual income above $125,000

This reduced income must happen sometime between Jan. 21 of this year and “60 days after the duration of the COVID-19 emergency or the duration of the COVID-19 outbreak or as a result of the COVID-19 outbreak.” In other words, the bill has a fairly open-ended time period, given that we do not know when the emergency period will end.

Will this bill become part of bankruptcy law?

We also do not know the future of this bill. Earlier this year, the total student loan debt held by Americans totaled an estimated $1.56 billion. Creditors are likely to oppose this bill and other efforts to help people use bankruptcy to discharge their student loans.

Meanwhile, you can still use Chapter 7 or Chapter 13 bankruptcy to regain control over your finances, make your debts manageable, and get out of the cycle of debt. If you are thinking about bankruptcy, consult a bankruptcy attorney to learn about your options.

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