Delaney Introduces HR 449 – The Discharge Student Loans in Bankruptcy Act of 2015

Michael Lux Bankruptcy, Blog, News, Student Loans 5 Comments

For most people who run into a personal finance crisis, bankruptcy is a last act of desperation to get their debt under control.  It isn’t pretty or easy, and it follows you around for years, but it is the first step to a fresh start.

A glaring exception to the bankruptcy protection in the United States is student loans.  Today, student loans are nearly impossible to discharge in a bankruptcy proceeding.  It hasn’t always been that way.  Initially, Federal Student loan borrowers lost the ability to discharge their student loan debt like all other debt.  Over time, and with heavy lobbying from private loan lenders, private student loans were treated the same way.

This week Congressman John Delaney, a Democrat from the 6th District of Maryland, introduced House Resolution 449, a bill that would eliminate the previous changes to bankruptcy law – effectively restoring bankruptcy rights to student loan borrowers.

According to Congressman Delaney, “Student loan debt is dragging down economic growth, keeping the American Dream out of reach for many and is a monthly strain for millions. While student loan debt is a complex problem that will require many solutions – increased support for grant programs, efforts to increase affordability, improved consumer education – we also need to reform our laws to help those with the absolute greatest need. Right now, there is effectively a huge student loan loophole in bankruptcy law that’s hurting real people.”

Why Bankruptcy for Student Loans?

Here at the Student Loan Sherpa, we think Bankruptcy for student loans is good economic policy.  Consider the following circumstances:

  • Someone gets injured and their medical treatment costs far more than they could ever afford
  • A man in his 40’s has a midlife crisis and buys a new Ferrari he can’t afford
  • A Fashionista goes nuts during fashion week and racks up 40k in credit card debt on designer clothes
  • An 18 year old borrowers 30k to pay for a year of college and then drops out

In each of the above examples, bankruptcy is an option for the individual who gets in more debt than they can handle.  The exception is the student loan.  College debt follows borrowers until it is paid off or until they die.  No other consumer debt is treated this way.

Will this bill pass?

Like most student loan legislation of late, this bill will be lucky to even make it out of committee.  There seems to be little support in the Republican House and Senate, and the national media has largely ignored the proposed legislation.

At present, it appears the best that borrowers could hope for is a national debate on the merits of bankruptcy for student loan borrowers.  Unfortunately, this bills seems to be falling through the cracks with barely a whimper.

  • If this happened, then the lenders would have to plan on writing off a portion of their loans. In order to offset that, they would raise rates to nullify the expected losses. This would provide higher payments to all, including those who are responsible and would pay them off regardless. It’s a tough sell.

  • If people can discharge their debt, the cost could be tremendous to society. There must be a better solution to student loans!

  • Joe Kazan

    Thank you for sharing these tips with us. I also agree with you that Bankruptcy for students loans is good economic policy. I think there should be a neat and clear solution for student loan borrowers. Student loan debt is not dragging down economic growth. Every student is a wealth of a nation. It will help to raise economic growth that I think so.

  • Michele

    This is a tough sell because its knowledge you’ve earned that you cannot return. HOWEVER, the person who gets medical treatment and doesn’t pay their bills gets healed and/or well. The person who racks up 40k in credit card debt also gets to keep what they bought. The person who attempts college and then drops out gets to keep the partial knowledge they learned. Something is not right here. If there is going to be “fine print” about what can be discharged in bankruptcy then lets add a whole lot more to that fine print. There are an awful lot of loop holes in the system already.

  • Jeff Bucknam

    Well my ex wife ran up 60k in credit card debt all in my name before she walked out on me. So no I didn’t get to keep any of it. She had an attorney for a year and half prior to leaving so she his everything in storage. This is common practice of attorneys to teach people before divorcing. Her but her credit is still one 800 and I can’t get approved for an apartment.