Changes in Bankruptcy Laws for Student Loans

The federal government has as a policy measure been keen to finance higher education by means of student loans. Liberal loan schemes are thus on the anvil. However during the seventies a large number of students who had availed education would file for bankruptcy to get out of the liability to pay the student loans

They would do this before they had started earning and thus could represent to the courts the plea of bankruptcy. However due to intense pressure the government changed the law 1998. This was further changed in 2005 when even private loans were brought in the ambit of the law.

The new changes effectively mean that Student loans are no longer dischargeable in any chapter of bankruptcy. This is a major change. The only condition that can lead to a discharge of a student loan in bankruptcy is if the student can prove that repaying the loan would create an undue hardship on him and his family. The onus of proving this is on the student himself.

Student loans are contracts like any other loan and are subject to challenge for fraud, etc. Also, students' loans are not enforceable when the school has closed prior to the student completing his education. These challenges could be raised in a Chapter 13 proceeding and decided by a bankruptcy judge.

According to these new changes, the student loan will only be discharged if the bankruptcy court is convinced that paying back the loan would bring about undue hardships on the student or the people dependent on him. Keeping this in mind, the Federal Student Aid Ombudsman (FSAO) has laid down three accepted standards that determine whether a person is eligible to have his student loan discharged. These are

a) In case you were forced to pay your student loan you will not be able to maintain a minimal standard of living.

b) Secondly it is difficult for you to maintain your finances for a significant length of period to pay the loan.

c) Lastly you have made an effort to repay the loan before filing for bankruptcy. The period to show for your effort is five years.

If you do not meet the above criteria, then there is no relief for you. Thus it is important that students are aware of the new provisions in the Bankruptcy law as far as discharge of student loans is concerned.