Obama Administration Backs Forgiveness of Student Loans in Bankruptcy

The Obama administration is urging Congress to make it easier for those who are burdened with student loan debt to discharge some of that debt through bankruptcy.

The rising cost of a higher education has driven the up the amount of debt students and graduates hold to $864 billion, raising concerns that this could be the next economic bubble to burst. The recommendation to allow bankruptcy protection for some student was issued by the Department of Education and the Consumer Protection Bureau. However, this would only apply to loans issued by private lenders, which represents 15 percent of student debt.

The report issued today attributed some of the problems with student debt to the loose lending practices of private lenders leading up to the financial crisis.

A law passed in 2005 made it nearly impossible to have student debt discharged through bankruptcy, but the White House has urged lawmaker to consider changing the law. Richard Cordray, chief of the Consumer Protection Bureau said that the law change has not resulted in lower costs or increased access.

Federally issued loans would still be exempt, unless a bankruptcy attorney can prove these loans are an extreme burden on the filer.

Banks warn that this change could cause interest rates to rise since their risk of loss would increase. They assert that it would be more tempting for borrowers to default on their loans because unlike mortgages they are not secured with assets. Republics in Congress are also skeptical of the idea.

Under the different debt-relief structures, a bankruptcy lawyer can ask the court to discharge some of their client’s debts and stop the collection activities of their creditors.

Bankruptcy attorneys carefully consider their clients financial situation before they can determine if their client eligible for Chapter 7 or Chapter 13 bankruptcy.