Student Loan Debt and Bankruptcy

It’s widely known that student loan debt is essentially non dischargeable in bankruptcy. As student loan debt gains for notoriety for stalling the economic well-being of families, so rises the question of changing student debt “discharge-ability.”

Bankruptcy Abuse Prevention and Consumer Protection Act

In 2005 the bank lobby enacted the Bankruptcy Abuse Prevention and Consumer Protection Act. This act essentially sealed the fate on private student loan debt – making it almost completely (except for extreme cases) nondischargeable in bankruptcy. Prior to 2005, only federal student loans were difficult to get discharged.

That change quickly meant a lifetime of indentured servitude to student loan debt payments for American families who had taken out loans to ensure the well-being of their college-bound children. Once one of those children graduated from college they were soon met with a struggling job market that could offer very little in terms of employment. Thus, the interest on the loan piles up. In extreme cases, this leads to default. But what’s most frustrating in all of this is the fact that this debt is not dischargeable in bankruptcy, and worse, it is hardly ever forgiven.

No “Re-Start” for Those with Student Loans

Even mortgage debt is dischargeable in bankruptcy and through foreclosure. While not ideal, families are able to re-start. But with student loans, there’s no sense of a “re-start.” This form of debt cannot be discharged, and even worse, banks and debt collectors can get a lien on not only the student’s home, but also the parent’s home (if they co-signed for the loan) and garnish wages and garnish bank accounts.

Affects Everyone

But this inability to pay affects everyone – even those who did not take out student loans. Having to pay large amounts of student loan debt takes away from the money that could be spent in other areas of the economy through purchase of homes and other goods. When that money is not put back into the economy it hurts everyone.

Source: The Seattle Times, Guest: The bankruptcy trap in student-loan debt, October 7, 2014