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New bill would forgive student debt during bankruptcy for some

As we have discussed in past posts, student loan debt can be extremely hard to get rid of, even for people who file for bankruptcy because of crippling medical debt. That’s why a member of Congress has proposed a small change in the consumer bankruptcy laws that would allow “medically distressed” individuals to have their student loan debt discharged during bankruptcy.

“[T]here’s no good reason to treat these [student] loans differently from other debt in bankruptcy,” the lawmaker who proposed the bill said. The Senate bill would allow people who paid more than $10,000 or more in medical bills during the three years leading up to bankruptcy to have their student loan debt forgiven as part of their bankruptcy discharge.

According to research by the Wall Street Journal’s Bankruptcy Beat, more than 171,000 people who filed for Chapter 7 or Chapter 13 bankruptcy in 2013 likely would have qualified under the terms of the bill to have their student loans dismissed.

Research from a Northeastern University law professor suggests that more than half of individuals who file for bankruptcy have enough medical debt to qualify for student loan dismissal under the bill, and about 30 percent of people who file for bankruptcy because of medical debt also have student loan debt.

Although this would be a significant benefit for people with student loan debt on top of medical debt, the bill faces a steep uphill battle. In the past, the financial-services industry lobby has fiercely fought against bills aiming to give bankruptcy judges more leniency in dismissing consumer debts.

Currently, individuals who are filing for bankruptcy can only have their student loans forgiven if they can prove to the bankruptcy judge that they cannot afford to pay them back, which is a very tough and expensive burden to meet, though not impossible as we discuss here.

Source: The Wall Street Journal, “Bill Would Let ‘Medically Distressed’ Cast Off Student Loans,” Katy Stech, Aug. 1, 2014

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