Gambling Debts vs. Student Loans – Guess Which One is Easier to Discharge in Bankruptcy?

Bankruptcy law has undergone several major changes over the past four decades. Each time the law has changed, Student loans have been affected to the detriment of borrowers.

In 1976, Congress instituted a five-year delay on bankruptcy protection was implemented for student loan debt. This was reasonable in light of the fact that a student could rack up debt and file upon graduation right before he/she cashes that first big check.

In 1990, two years were added to the waiting period for a total of seven years.

 In 1998, the tough love began. In that year, Congress changed the law so that federally backed student loans were now non-dischargeable through bankruptcy.

In 2005, Congress instituted the most recent bankruptcy law changes. Once again student loans were a major issue. The banking industry convinced congress to protect private student loans. As of October 17, 2005,when the law went into effect, private student loans became non-dischargeable except in circumstances where a debtor can prove that they present an undue hardship to the debtor and/or dependents. Case law has reduced the under hardship issue to what is known as the Brunner test which requires the debtor to demonstrate attempts  to pay back the debt and that debtor cannot maintain a minimal standard of living among other factors. This has meant that most if not all debtors cannot discharge their student loans.

I have assisted debtor with over a hundred thousand dollars in unsecured debt such as credit card and personal loans obtain a discharge. On the other hand, most of my clients cannot walk way from their student loans. It goes to show the warped sense of priorities that you can rack up all manners of credit card debt and personal loans and obtain a discharge in bankruptcy, but if you choose to obtain a college education you may be stuck with that debt forever even if you are struggling financially.

 Senator Elizabeth Warren said it best when she said:

“Why should students who are trying to finance an education be treated more harshly than someone … who racked up tens of thousands of dollars gambling?”

This statement was made in a recent article on Salon written by David Dayen.

Why does the law makes someone who made what most would consider a positive choice to seek an education be forced to jump through more hoops than a gambler or a shopaholic who racks up thousands in credit card debt?  It would be easy to point to the banking industry’s lobbying efforts but if young folks were paying attention and voting in large numbers it is not inconceivable that Congress would have listened. After all, Congress is always worried about the next election.

Driven by the recession and a weak recovery, a Bill was introduced by Senator Dick Durbin in the US Senate but the bill floundered. This issue however is not going away unless the economy heats up and student loan default rates decrease.

As always, this is a brief overview of a complex legal issue and you should consult a knowledgeable bankruptcy lawyer before taking any action.

Joseph K. Githuku

9407 Harford Rd

Baltimore, MD 21234



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