Crushed By Student Loan Debt? You can get a bankruptcy option
Student loan borrowers crushed by five- and six-digit balances could have their payments canceled under a bill introduced by federal lawmakers this week that would expand national bankruptcy laws.
If adopted, the Consumer Bankruptcy Reform Act, 2020 would create a new Chapter 10 provision in the U.S. bankruptcy code under which student loans would be treated like credit cards, medical bills, and other consumer debt. Borrowers could apply for Chapter 10 enrollment and possibly have their student loan balance withdrawn with the approval of a bankruptcy judge.
The proposal is part of a larger bankruptcy measure introduced Wednesday by Senator Elizabeth Warren of Massachusetts and Representative Jerrold Nadler of New York, both Democrats.
The Chapter 10 filing would give “significant bankruptcy relief and give Americans a better chance to get back on their feet,” Warren said in an declaration.
A solution of last resort
It should be noted that filing for bankruptcy has major drawbacks. A bankruptcy filing is noted on your credit report for at least seven years and can make it more difficult to get a mortgage, car loan, or credit card. For many borrowers, however, this may still be better than having to pay hundreds of dollars in monthly payments spanning years or decades.
The Warren-Nadler proposal comes as total student loan debt in the United States has reached a historic $ 1.7 trillion owed by 45 million borrowers. Americans say they are even more concerned on payments in an economy devastated by the pandemic where millions of people .
“Bankruptcy is an option of last resort,” Nadler said in a statement, “but it also promises a fresh start so people can get up and continue to work and provide for their families.”
President-elect Joe Biden has lobbied to eliminate up to $ 10,000 in debt for each borrower. In the meantime, the Department of Education has ordered debt collectors to continue to to suspend collection activity and accrued interest until at least February, as Congress tries to craft a new stimulus package, the latest version of which offers $ 4 billion in relief for .
The new bankruptcy bill would also make it easier for Americans to set up payment plans for medical bills, credit card debt, car loans, and mortgages. It would also prevent debtors from having their homes and cars confiscated by creditors, said Warren and Nadler, who proposed a similar plan last year.
Mixed feelings about bankruptcy
Before 1976, Americans could file for bankruptcy and have their student loans written off. Bankruptcy changes in 1978 and 2005, which were passed to discourage what critics called bankruptcy abuse, made it harder to write off those debts.
The Warren-Nadler proposal has received mixed reactions from former students who now owe six figures from their college years.
Austin, Texas, Resident Jennifer King, 52, owes $ 250,000 in student loans after defaulting on payments for about 20 years. While she approves of bankruptcy as a way to reduce student debt, she doesn’t believe it should wipe out the balance altogether.
“If you borrow money, you should be required to repay part of it,” said King, who filed for bankruptcy in 1998.
King filed for bankruptcy to eliminate other debt so she could afford to pay off her student loans, she said. She racked up the hefty six-figure payroll after earning a BA in Criminal Justice from St. Edwards University and an MA in Criminal Justice Administration from National American University.
Katherine Kovarick, hairstylist in Delray Beach, Florida, said she would not go bankrupt because “I would have to live in credit shame for 7 years.”
Kovarick, 36, owes around $ 190,000 towards his studies at the University of Florida and Ohio University. She said lawmakers should pass a proposal that cancels student loans without borrowers having to file for bankruptcy.
“They bail out airlines, banks and businesses left and right, but for some reason there is a problem with bailout people,” she said.