When Did Laws Go Into Effect Preventing Bankruptcy of Student Loans?

By Mary Jane Freeman

Prior to 1976, debtors could discharge all student loans in bankruptcy. However, that slowly changed with a series of amendments to preexisting bankruptcy law, making it harder to discharge student loans. As a result, as of 2013, debtors can only discharge education loans if they can prove that paying these loans creates an undue hardship for themselves and their dependents. The criteria for discharging student loans is so stringent that most bankruptcy filers can't satisfy it.

Early Bankruptcy Law

Bankruptcy was governed by the Federal Bankruptcy Act until 1976. However, Congress established a commission to look into the bankruptcy system during the 1970s and suggest reforms. In 1976, Congress adopted the commission's recommendations, which resulted in the Bankruptcy Reform Act of 1978, known as the U.S. Bankruptcy Code. The Bankruptcy Code replaced the preexisting Bankruptcy Act and limited the dischargeability of student loans. At first, the new law excluded student loans made by the government, colleges and universities from discharge; however, other student loans remained dischargeable as long as you were repaying for five years or they represented undue hardship. Over a period of approximately 25 years, additional limitations were enacted further eliminating the dischargeability of student loans. One notable one was the Bankruptcy Amendments and Federal Judgeship Act of 1984, which also made private student loans from nonprofit lenders non-dischargeable.

Bankruptcy Law Today

A significant amendment to the U.S. Bankruptcy Code occurred in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act. Under this Act, additional qualified student loans are exempt from discharge, including most private student loans. Prior to the amendment, only private student loans funded in whole or in part by the government or a nonprofit organization were exempt from discharge.

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Does Chapter 7 Cover Student Loans?

If you are overwhelmed by student loan debt, you may consider filing for bankruptcy. There are two different types of student loans: private and federal loans. Federal student loans are backed by the federal government and offer a fixed interest rate. Banks and other financials institutions issue private loans, and interest rates on these loans are typically much higher than federal loans. While filing for bankruptcy may seem like a good option, it can be very difficult to discharge your student loan debt in bankruptcy and will require a showing that the student loan constitutes an undue burden.

Will I Get Discharged From Bankruptcy If I Owe Taxes?

Many people filing bankruptcy are also behind on their taxes. Most taxes are not dischargeable in bankruptcy, but in some cases, a portion of the taxes owed may be discharged if certain conditions are met. If you owe taxes, this won't prevent your other debts from being discharged.

Rules for Filing a Second Bankruptcy

Depending on the type of second bankruptcy you want to file, there may not be a waiting period or a waiting period of up to eight years. A second bankruptcy may also be filed after a dismissal of the first one. A dismissal is different from a discharge. A discharge releases you from any liability to your creditors, while a dismissal is when the court throws out your case before it is completed. Usually, a dismissal arises from a failure to file necessary documents or failing to make payments under a Chapter 13 repayment plan.

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