August 6, 2012

Can you clear your student loans debt by declaring bankruptcy?

The Director of the Consumer Financial Protection Bureau, this week, proposed changes to federal law that would allow people to wipe out part of their student loans through declaring bankruptcy. Richard Cordray, who has held the post since January, suggested the changes as part of a larger criticism of practices by private loan providers. In 2005, Congress passed a law making it difficult for borrowers to escape student debt through bankruptcy in hopes that it would push private lenders to lower their rates. Disappointingly,, the law had little effect and student debt has since more than doubled to roughly $1 trillion. With such a tremendous rise in debt affecting Americans of all ages, great focus has been given to providing flexibility and forgiveness to those heavily weighed down with student loans.

Cordray’s recommendation is the latest in a series of reform efforts aimed specifically at America’s private lenders, which generally provide less flexibility to borrowers especially in times of economic stress. Unfortunately for Cordray and others hoping to bring relief to the many Americans struggling with student debt, private loans make up only 15% of all the loans in America, with federal loans accounting for the remaining 85%. Perhaps more importantly, statistics show that federal loans are in fact more likely to be defaulted on than those from private lenders, and even the federal government has some rather aggressive tools at its disposal to recover money from its borrowers (such as garnishing wages and withholding tax refunds). While Cordray’s proposals on bankruptcy may be a good step in providing some relief to many of the nation’s borrowers, more changes will likely be necessary to tackle the growing issue of student debt.

Posted In: Bankruptcy