The economic situation of many in the U.S. is grim. Over 11 million Americans are underwater in their mortgages, according to CoreLogic. Mortgage foreclosures continue, with one in 605 housing units nation-wide receiving foreclosure notices in September 2011, according to RealtyTrac. The Federal Reserve and Presidential 2011 budget statistics report student loan debt in the U.S. has reached $1 trillion, surpassing credit card debt for the first time. The amount of people defaulting on student loan payments is on the rise according to the Department of Education. Some experts and lawmakers are proposing changes to the Bankruptcy Code making it easier for those mired in mortgage and student loan debt to find relief.
Changes to the Law
Legislators in Washington D.C. have proposed legislation in both the House and Senate that would allow people to discharge private student loan debt in bankruptcy. Prior to the 2005 changes in bankruptcy law, federal student loans were the only student loans that people could not discharge in bankruptcy. Lawmakers believed that it was reasonable to exempt these loans from bankruptcy discharge in order to protect the government's investment in higher education. Additionally, federal student loans offer protections for borrowers that help insure that people will not be overwhelmed with debt, such as fixed, modest interest rates and hardship forbearances in repayment. Unfortunately, private student loans do not offer such safeguards and often can be as overwhelming to people as credit card debt.
Moreover, some financial experts are also calling for an amendment to the Bankruptcy Code that would allow people filing bankruptcy to write down the principals of their mortgages to the current value of their homes and make reduced payments.
How the Changes Would Benefit the Economy
Experts who advocate for these reforms believe that they are necessary for the recovery of the U.S. economy. Consumer spending accounts for 70 percent of the country's economy, according to a senior economist at IHS Global Insight. When people have no disposable income because of crushing debt, they cannot spend money elsewhere - the effect ripples out to those whose livelihoods count on others spending money and shrinks the national economy.
Experts also suggest that allowing people to write down their mortgages to the actual values of their houses would help with the real estate valuation problem in the country.
Those struggling with underwater mortgages and student loan debt will have to wait to see if lawmakers actually modify the law to help their situations. Bankruptcy might still be a viable option for some, even without changes to the law. If you are overwhelmed with debt, contact an experienced bankruptcy attorney who can discuss your situation with you and advise you of your options.
