Most debtors with student loans find that they’re unable to discharge them in Chapter 7 or Chapter 13 bankruptcy. But the good news is that the Obama Administration is pushing for changes to how borrowers are educated about student loan debt and how that debt is handled both inside and outside of bankruptcy. Here’s what you need to know:
Possible bankruptcy legislation.
While the Obama administration hasn’t made any concrete suggestions for how the bankruptcy laws should be changed, they have made it clear that the current way student loans are treated in bankruptcy needs to be examined and altered so that borrowers are treated fairly. Currently, student loans are nearly impossible to discharge unless the borrower can pass an “extreme” hardship test. And just to give you an idea of how difficult it is to pass this test—even some debtors with permanent disabilities are unable to win a bankruptcy discharge for their student loan debt.
For most students taking out loans, there is a lack of understanding of how doing so impacts their future finances. The Obama administration has promised that new rules will be pushed forward requiring lenders to clearly disclose the terms of the student loan and the ramifications of late payments and defaults. For debtors getting out of Chapter 13 or Chapter 7 bankruptcy, this can be a lifeline as they try to repay this debt.
The Obama administration has promised that new rules will be pushed forward requiring lenders to clearly disclose the terms of the student loan and the ramifications of late payments and defaults.
Centralized complaint system.
While many student loan servicers are easy to work with, some are difficult or even downright abusive and unprofessional. The Obama administration has ordered that the Department of Education to launch a centralized complaint system that debtors can use when they have issues with servicers. For a post-bankruptcy debtors this can make a huge difference, especially if lenders are failing to properly post payments or reporting inaccurate information to the credit bureaus. And since the data collected from this complaint system will be used to rate servicers, lenders will be compelled to clean up their customer service.
Easy repayment applications.
While you can currently apply for special repayment plan that reduce your monthly student loan payment amount, doing so might be challenging. Depending on the lender, it may not even be clear that you’re entitled to apply for the special repayment programs. Also, the current application process requires that you gather detailed information about your finances. The Obama administration is now suggesting that this process connect directly to the U.S. Treasury Department to get borrowers’ financials immediately, simplifying the process.
Check out more information on what initiatives and suggestions are being pushed by the White House.