Personal bankruptcy may soon relieve consumers of student debt

On Behalf of | Aug 2, 2012 | Personal Bankruptcy |

A recent report was released by the Consumer Financial Protection Bureau suggesting that Congress should consider changing the rules concerning the discharge of private student loan debt during bankruptcy proceedings. The current policy, based in a 2005 law, prevents borrowers in New Jersey and elsewhere from having their private student loan debt eliminated along with other forms of debt during a personal bankruptcy filing. The law was enacted to encourage private lenders to lower interest rates on student loans, an outcome that the director of the CFPB says never came to fruition.

To clarify, the proposed change would only affect student loans issued by private lenders; no federally issued loans would become eligible for discharge under the current proposal. The vast majority of total outstanding student loan debt, nearly 85 percent, is in the form of federal loans. Furthermore, research from the Department of Education and an organization that tracks student loans suggests that the default rate for federal loan debt is nearly twice that of privately held loans.

When an individual is in default on a private loan, the lender can garnish the wages of the borrower. The federal government can also garnish a borrower’s wages, but also has the ability to seize tax refunds and garnish Social Security payments to cover the outstanding debt. Between the years of 1998 and 2009, the CFPB says that approximately 2.1 million Americans with federally issued loans went into default.

While the change would certainly help some consumers to shed more of their total outstanding debt through bankruptcy, there are many who oppose making changes to the existing policy. It has been asserted that the change may help some, but the end result could be a higher cost to taxpayers. New Jersey residents who hold significant student loan debt and are considering bankruptcy should be sure to weigh all of the available options before filing for personal bankruptcy. The timing of such a filing can significantly affect the bottom line, and many savvy consumers know that seeking professional advice can make all the difference in regaining financial security through bankruptcy.

Source: Smart Money, “Can Bankruptcy Solve Student Loan Woes?” AnnaMaria Andriotis, July 20, 2012


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