Student Loan Debt and Bankruptcy

Student loan debt is now, more than ever, a crisis in the United States. Consider the following numbers:

• As of 2019, student loan debtis at an all-time high with a national total of $1.5 trillion.
• In a recent study, 32% of consumers who use a bankruptcy-assistance service to file for Chapter 7 bankruptcy protection has student loan debt.
• In 2018, the average student-loan debt per graduating student who took out loans was a staggering $29,800.
• From the late 1980s to 2018, the cost of an undergraduate degree increased by 213% at public schools and 129% at private schools, adjusting for inflation. During that time, annual tuition rose to $9,970 from $3,190 for public schools and to $34,740 from $15,160 for private schools.
• Young people aren’t the only ones paying off debt. More than 3 million senior citizens in the US. owe more than $86 billion in unpaid student loans. They have even dipped into their Social Security benefits in order to pay them off.
• Costs for professional degrees are rising too. In 2013, only 14 people in the US owed $1 million or more each on their federal student loans. By 2018, that had increased to 101 people.
• Black graduates with a bachelor’s degree default on their loans — meaning they do not make a payment for 270 days — at five times the rate of white graduates. They are also more likely to default than white college dropouts.
• 40% of borrowers could default on their loans by 2023.
• Student-loan borrowers are putting off plans to have kids. Some of them are also delaying or stopping themselves from buying a house, because they don’t have a means to do so.

But then again, student loan debts are usually not discharged in bankruptcy. Often, the recourse is to file bankruptcy in order to discharge unsecured debts, like credit card debt and medical bills, which would free up their budget in order to pay off their student loans.
In other words, the 32% of student loan debt-carrying consumers filing for Chapter 7 bankruptcy get their debts discharged but they are still obligated to pay off the remainder of their debts, which are mostly student loans.
Does this imply that one has to pay off debts all their lives? Is there really no hope for financial freedom?
We mentioned that student loans are generally not discharged in bankruptcy. Like other non-dischargeable debts such as child support and alimony as well as tax liens, it may be challenging to wipe out student loan debt. However, it is not entirely impossible to discharge student loans in bankruptcy.
Just recently, recommendations from the American Bankruptcy Institute’s Commission on Consumer Bankruptcy proposed changes that aim to address issues that have made it more challenging for debtors to file bankruptcy. The report touched on concerns such as  legal representation costs, rainy day funds for debtors with unexpected expenses and the disproportionate number of African-American consumers in a certain type of bankruptcy proceeding. The report was put together by prominent members of the bankruptcy community, including former judges, academics and lawyers from both the debtor and creditor sides. Hopefully, this will help people struggling with financial debt brought about by student loans.
Filing a Student Loan Bankruptcy

1. Work with a bankruptcy lawyer. A bankruptcy attorney, especially one who is knowledgeable about student loan debt will make it easier to go through the nuances of the complex world of bankruptcy proceedings. While it may be difficult to have your student loans discharged, your experienced bankruptcy attorney may help in discharging your other unsecured debt .  This will give you some sense of financial relief and may help you pay off your student loans.
2. File for Chapter 7 or 13 bankruptcy. Discharging student loans comes at the end of the bankruptcy process. There are several types of bankruptcies but the more common personal bankruptcies are Chapter 7 and Chapter 13. Chapter 7 is a liquidation bankruptcy for people with limited incomes who can’t pay back all or a portion of their debt. The goal of Chapter 7 bankruptcy is to discharge the debt. Consumers who file for Chapter 13 bankruptcy expect restructuring of debt through a repayment plan that takes three or five years and that ultimately leads to a bankruptcy discharge. Your attorney can help determine the type of consumer bankruptcy that’s best for you: Chapter 7 or Chapter 13.

If you’ve already filed for bankruptcy but didn’t attempt to have your student loans discharged, you can reopen the case and appeal for them to be cleared.

3. File a complaint to begin the adversary proceeding. Wiping out student loans through bankruptcy requires an additional lawsuit known as an adversary proceeding. In order to do this, your bankruptcy attorney must file a written complaint presenting the details of your case. From there, the case will be litigated until the judge determines the outcome. You may receive full discharge, partial discharge or no discharge.

Proving Undue Hardship
During your adversary proceeding. you will have to prove repaying your loans would cause you “undue hardship.” Undue hardship is measured by the Brunner test, which requires bankruptcy filers to meet specific criteria in order to be eligible to have their student loans wiped out.
You must prove that you meet all three parts of the Brunner test to get your college debt discharged:

• Poverty – Prove that you cannot maintain a minimal standard of living, based on your current income and expenses, while also paying student debt.
• Persistence – Prove that your finances will likely stay the same during repayment. Though this is harder to prove, other circumstances may be considered in the Brunner test such as a serious mental or physical disability, obligations to dependents, a poor-quality or limited education, number of years remaining  in your work life indicating that you may have maximized your income potential in your field, lack of assets, lack of better financial option.
• Good faith – You made an effort in good faith to repay your student loans and that you attempted to resolve the issues by working with the lender and other means such as making some loan payments, attempting to negotiate a payment plan and working to slash unnecessary expenses and increase income.

Looking at Bankruptcy As Your Option
If you have exhausted all payment options, have been past due on your student loans or have defaulted on your loans, bankruptcy may make more sense.
These situations are no guarantee a bankruptcy court will discharge your student loans, but it has happened for some borrowers. A study published in the American Bankruptcy Law Journal in 2012 found that, in 207 bankruptcy cases in which debtors included their loans, 39% won full or partial student loan discharges.
Seeking legal professional advice
If you do decide to file for student loan bankruptcy, talk to a legal professional first. A student loan lawyer or bankruptcy attorney with student loan experience can assess your circumstances and help you establish what your best option is. Talk to our experienced bankruptcy attorneys at Northwest Debt Relief Law Firm for an initial free consultation.

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