A means test was instituted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The idea of the bankruptcy changes was to make it harder for serial filers to abuse the system while offering token protection for consumers. Since a student loan is not considered a living expense under the means test, I find the law somewhat obfuscating the intent of protecting consumers.
A Student Loan is Exempt from Bankruptcy Discharge
Overall, approximately 75% of all student loans are federally subsidized. That means the taxpayer, you and I, are standing behind most student loans today. All taxpayers are consumers.
If the new bankruptcy laws were designed to help protect taxpaying consumers, I would think it would be in the taxpayer’s best interest for the federal government to try and collect back a student loan as fast as they possibly can. The longer the feds wait to collect its debts, the more the taxpayers stand to financially lose. Likewise, taxpayers stand to lose the most when there is an outright default on a student loan.
For the protection of the taxpayer, the federal government passed bankruptcy laws that made any student loan, both private and government, exempt from bankruptcy discharge. A debtor might not go to jail for defaulting on a student loan debt, but he can have his wages garnished, assets taken, and be hounded for the debt until the day he or she dies.
The student Loan Problem for the Means Test
The feds did not see fit to include a student loan debt as a living expense in the means test for determining what type of bankruptcy you are eligible to file. A student loan is a debt like any other debt. Debts are usually associated with principal, interest, fees, payments, and penalties, and so is a student loan.
The Feds allow a student loan to be postponed during a chapter 13 payment plan for up to five years. During this time, interest on the student loan can accrue, but you are not allowed to use the expense as part of your formula for determining your disposable monthly income.
By not giving a student loan expense status in order to determine what kind of bankruptcy a debtor can file, one might conclude the law favors certain unsecured creditors, which in most cases are a part of big businesses. The law seems to favor these types of debts more than the unsecured debt of a student loan.
The Main Disadvantage in Not Considering a Student Loan in Means Test
The main disadvantage for the taxpayers of America in not considering a student loan in the means test is that excluding the expense will throw more debtors into filing a chapter 13 bankruptcy in lieu of a chapter 7 bankruptcy.
Filing a chapter 13 is much more likely to cause student loan payments to be postponed while during the plan. In effect, taxpayers claims will be placed on the wait list while other unsecured claims are getting paid.
It is the opinion of this writer that favoring the law favors the unsecured debt of some big businesses more than the unsecured debt of the taxpayers. A lot can happen to a debtor during the time when paying on a chapter 13 plan.
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