Yesterday, Sen. Barack Obama (D-Ill.) unveiled plans to rewrite federal bankruptcy laws to make it easier for financially-strapped senior citizens, military families, and individuals suffering medical emergencies to get relief from debilitating debts. While we are pleased that the presumptive Democratic presidential nominee is proposing to overhaul the 2005 bankruptcy bill, which was a glaring example of politicians putting corporate interests over regular people, we urge him not to forget another group who desperately needs help -- borrowers who have taken on unmanageable levels of private student debt and now find themselves in severe financial distress.
As we have noted previously, Congress tucked a provision into that bankruptcy bill making it extremely difficult for borrowers to discharge private student loans. That special provision was added in a secret conference committee, without any public debate or notice.
For most unsecured debt, a borrower who runs into difficulty can file for Chapter 7 liquidation or Chapter 13 reorganization, so a judge can sort out the appropriate treatment of various loans. But there is a short list of debts that the law subjects to a different status, allowing discharge in only the most extreme circumstances. The government, for example, makes it nearly impossible for people to escape child support responsibilities, overdue taxes, and criminal fines.
Federal student loans also can't be discharged. There's at least some justification for providing federal loans that status since they are backed by taxpayer dollars and come with borrower protections in cases of economic hardship, unemployment, death, and disability. But there is no good reason for private loans to be accorded the harshest bankruptcy status.