As discussed in a previous post on this blog, student loans are generally not eligible to be discharged, even in bankruptcy. A Maryland Democrat, however, wants to change the Bankruptcy Code and make student loans dischargeable. Representative John Delaney recently introduced the Discharge Student Loans in Bankruptcy Act of 2015, a measure that, if enacted, would amend 11 U.S.C. 523(a). Student loans would then be on par with all other dischargeable unsecured debts, including credit cards, payday loans, medical bills, and signature loans.
According to a press release issued by his office, Congressman Delaney supported some similar measures in the previous Congress, such as expanding the Pell Grant program and restricting student loan interest rate increases. He also co-sponsored the Truth in Tuition Act, which would have required certain post-secondary institutions to be more forthcoming about their tuition and fees.
Nondischargeable Debt
Chapter 7 Bankruptcy automatically wipes out most unsecured debt, giving the filer a fresh financial start, but there are some exceptions including:
- State and federal income taxes: These accountsfollow the 3/2/240 rule. The taxes must be at least three years old, the returns must have been filed at least two years prior to the bankruptcy, and the government must not have assessed the tax within the last 240 days. As a rule of thumb, if you have not received a collections notice in the last nine months, the tax has probably not been assessed in that period. Only income taxes fall into this category; payroll taxes and other debts are typically not dischargeable under any circumstances.
- Fraud: The law presumes that any debt incurred within 90 day prior to the filing date is fraudulent, meaning that the debtor took out the loan with the intention to file bankruptcy and discharge the debt. The government must still prove actual fraud at a hearing.
- Omitted Debts: If you do not list a debt on your schedules, it is not dischargeable, so it is very important to fully comply with the trustee’s demands and your lawyer’s requests.
- Domestic Support Obligation: DSOs, including child support and spousal support, are only dischargeable if the obligation was assigned to a third party or if the divorce decree specifies that a debt payment is considered “non-alimony.”
- Student Loans: Any education debt incurred by an individual is dischargeable only if repayment “would impose an undue hardship on the debtor and the debtor’s dependents.” Generally, courts require that the debtor suffer from a physical or mental disability.
- DUI Damages: Personal injury obligations are dischargeable unless drugs or alcohol were involved.
Other exceptions include certain homeowners’ association dues and unpaid judgments related to fraudulent banking practices.
Almost seven in ten recent college graduates owe an average of $30,000 in student loans and many financial experts expect student loan debt to continue grow in the coming years. Combined with other obligations, the financial pressures can be overwhelming. If you are looking to eliminate most of your unsecured debt and get a fresh start, contact an experienced bankruptcy attorney in Phoenix today. We can help you understand all of the options available to you under the law.