There is a difference between government and private student loan debt. However, in bankruptcy both were treated at par even though private student loans did not provide benefits like government ones yet could not be discharged like other unsecured debts. Since 2013, the Private Student Loan Bankruptcy Fairness Act is being mulled in Congress to level the playing field between borrowers and private student loan lenders. However, it needs to become law before any change can be seen, say lawyers of Los Angeles based bankruptcy law firm Recovery Law Group.
Private student loans were treated like other unsecured debts (medical bills, credit card debt) before 2005 i.e. during bankruptcy; these debts were discharged along with other unsecured debts. However, with the enforcement of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, private student loans were clubbed together with federal student loans. With this change, private student loans could only be discharged if repaying them would result in undue hardship, which is extremely difficult to prove.
Why federal and private student loans need to be separated?
While applying for federal student loans, your credit history or ability to repay loans is not considered. Additionally, this has no effect on your interest rate as interest rates are limited for federal loans. Generally, these interest rates are lower than average interest rates of private student loans. On the other hand, private student loan lenders can choose to lend you the loan or deny it depending on your credit history. Their interest rate will also depend on your credit ratings.
Repayment of student loans is different in both cases too. While federal student loan borrowers can opt for flexible repayment plans (low monthly payments, longer duration of repayment, getting rid of some portion of debt, etc.) and get rid of debt after paying a minimal amount as repayment. On the contrary, private student loans provide no such relief. If you are having financial issues, you can ask the lender for a rebate however, it is optional for the lender to agree to the offer. Flexi-paying options are not available in this case.
Considering that there is marked discrepancy between both the lending and repayment process of federal and private student loans, it does not make sense of giving them the same privileges as federal student loans, especially during bankruptcy. Thankfully, the congress has introduced the Private Student Loan Bankruptcy Fairness Act (H.R. 532) to remove the special treatment accorded to private student loans in bankruptcy. this will put them at par with other unsecured debts which can be discharged during bankruptcy providing debtors with the much-needed relief. Currently, the bill has a 2% chance of becoming a law, however, it is supposed to gain momentum. A bankruptcy lawyer might help you know whether you can get these loans discharged in bankruptcy or not. to know your options during bankruptcy, you can call 888-297-6023 and speak with experienced bankruptcy lawyers.