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CFPB Calls For Modest Bankruptcy Reform for Private Student Loans

One of the most questionable changes to the Bankruptcy Code in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was to extend the “undue hardship” standard to discharging private student loans. For New York bankruptcy, this meant that irrespective of who the lender was student debts were basically permanent. Fortunately, for federal loan borrowers, income-sensitive repayment programs now exist that cancel their loans after ten or twenty years. (Whether these programs so generous that they’ll lead to a student loan write-down in the future is another issue entirely.)

The Consumer Financial Protection Bureau (CFPB) issued its annual ombudsman’s report, which criticized the how the Bankruptcy Code now treats private student loans. Lamentably, to a great extent it held back from simply calling for a full repeal as some Congresspeople have been trying to do with the Fairness for Struggling Students Act or the Private Student Loan Bankruptcy Fairness Act.

What it did say, though, was that the justifications for the law-change in the BAPCPA were largely unfounded. Banks insisted that largely disallowing bankruptcy for private student loans would enable them to charge lower interest rates because the lower likelihood of discharge reduced the overall risk of student loans for those lenders. In truth, the lower rates didn’t really come about, but banks did offer slightly more loans to people with lower credit scores.

Instead, as one might have predicted, shielding private student loans simply discourages private lenders from negotiating with student debtors who are having trouble making their loan payments. If the debt is essentially permanent, then banks stand to make even more money if debtors default due to penalties and extended repayment terms. The CFPB report gently rebuked private lenders, telling them to “consider the potential effects of the negative customer experience for a new graduate associated with lack of assistance in terms of distress, including the possibility of loss of goodwill that may affect future demand for products from particular institutions.” The CFPB report then recommended Congress to alter the Bankruptcy Code to limit bankruptcy protection to lenders that offer long-term loan modification options like a chapter 13 bankruptcy plan.

The full report can be found here (pdf).

It’s a little disappointing that the CFPB won’t call the “undue hardship” exception out as the bad idea that it is, but hopefully some lenders will start to care more about what their customers think of them. That having been said, if you have private student loans and they’re causing difficulties, talking to a bankruptcy lawyer can help you explore your options, even if discharge is unlikely.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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