Consumer Commission – Student Loan Discharge Recommendations

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The American Bankruptcy Institute’s Commission on Consumer Bankruptcy issued its final report last week.   This is the first in a series of articles about those recommendations.  To see more information about the Commission, follow this link.
As a commissioner, I can tell you that the subject of student loans in bankruptcy was probably the single most popular topic of suggestions to and discussions  within the Commission. And the Commission took that to heart.
Most critically, we recommended bankruptcy law be re-written to allow for more student loans to be discharged — or paid — in bankruptcy cases.  The very first formal recommendation called for restoring the fresh start intended by bankruptcy law.  It proposed:
That a student loan would be discharged in bankruptcy unless the debt was (1) made, insured or guaranteed by a government agency; (2) that it was incurred for your own education; and (3) the loan first became payable less than 7 years before the bankruptcy was filed (unless you can show an undue hardship).
This is a sweeping and dramatic change the Commission proposed.  It would eliminate protection for private student loans.  It would eliminate loans taken out (either directly or co-signed) to pay for someone else’s education.  It would return to the rule that governed bankruptcy more than 20 years ago by allowing the discharge of loans that had been payable for more than 7 years – and strengthen it by clarifying that this period included any time when payment was suspended.
There is no doubt that asking Congress to allow student loans to be discharged more broadly will be challenging.  But the process has become so burdensome and difficult — and the amount of student loan debt that is burdening both the country and individuals, even after bankruptcy — clearly shows it is time for a change.
In my next installment, I will outline additional student loan recommendations in the report.

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