The Dilemma of Private Student Loans in Bankruptcy

14 May The Dilemma of Private Student Loans in Bankruptcy

The misleadingly named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created a dilemma for debtors with private student loan obligations. That act extended the undue hardship requirement for discharge in bankruptcy to private student loans without making available the Federal reduced payment plans that partially relieved burdens to lower-income debtors.

If the entire obligation is federal or federally guaranteed, borrowers are eligible for either a hardship deferment or an Income contingent repayment plan (ICRP). A workout agreement can be calculated at the Federal student loan website. This is not possible when private student loans are thrown into the mix.

The central problem for many borrowers is that there are no comparable workout agreements available for private student loans. Private student loans were made nondischargeable except in cases of undue hardship and the provision was retroactive, so earlier loans, incurred when dischargeability in bankruptcy was a more accessible option, abruptly became nondischargeable for many borrowers.

This problem was created by an act of Congress and would require an act of Congress to remedy. The courts will be seeing many more cases of this nature, given the recent proliferation of private student loans and the growing numbers of families in serious financial trouble because of the depressed housing market and rising unemployment.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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