For many who consider filing for bankruptcy, one of the biggest surprises and sources of frustration is the knowledge that student loan debt can almost never be discharged in bankruptcy. While most other types of unsecured debt are dischargeable (including credit card balances and medical bills), government and private student loans have been protected against discharge since the passage of a federal law in 2005.
These debts are a major problem for a significant portion of the country. About 44 million Americans have student loan debt collectively totaling $1.6 trillion. Now, with about 34 million people out of work due to the Covid-19 pandemic, some legislators are trying to change the bankruptcy code to help those who are currently facing hardship.
In July, one Democratic congresswoman in the U.S. House of Representatives introduced the “COVID-19 Student Loan Relief Act of 2020.” It was co-sponsored by several other House Democrats (but with no Republican support). If passed, it would allow bankruptcy filers to discharge their student loan debt if their income was sufficiently reduced during the Covid-19 pandemic or as a result of it. Eligible filers would also include those who had a primary income earner in their family either die or become permanently disabled due to Covid-19. The discharge would apply to both government and private loans.
Will this bill pass both chambers and be signed into law by the President? In our current political climate, the answer is almost certainly no. But the fact that student loan debt in bankruptcy is an active topic of conversation is a good sign that at least some legislators care about this issue and want to fix it.
Things haven’t always been this way. Prior to 1978, student loan debt was dischargeable – and that was back when loan debt was far more reasonable than it is today. In 1997, federal loans gained protection against discharge except in cases where it would pose “undue hardship.” In 2005, private loans also got protection. Given the relatively recent timeline of these changes, it stands to reason that things could change again (if conditions in Congress were right).
For the time being, we must assume that student loans will remain non-dischargeable in bankruptcy. But if you are considering bankruptcy and carry significant student loan debt, filing for bankruptcy may still be a wise option. By discharging or reorganizing other types of debt, it is often possible to make student loan payments affordable once again.