Using Bankruptcy to Erase Student Debt Is Not Impossible
During his 2020 campaign, Joe Biden said he wanted to provide $10,000 in student loan forgiveness per borrower. Across-the-board debt cancellation programs have not happened, with only a narrow subset of loans being erased.
Almost 43 million Americans owe a total of $1.57 trillion in federal student loans. The average federal loan is $36,510. Federal loans account for about 92% of the debt. Private loans comprise the remaining 8%. The private loan balance is about $137 billion.
Between the rising cost of living and the pandemic, student loans are becoming increasingly difficult to repay for many Americans. Depending on the borrower’s individual situation, bankruptcy may be an option to consider.
The Role of Student Loans in Personal Bankruptcy
About 32% of people filing Chapter 7 bankruptcy have outstanding student loans. On average, their student loan balance is almost 50% of their total debt. More than two-thirds of personal bankruptcies are filed under Chapter 7. Those with incomes too high to qualify for Chapter 7 file under Chapter 13. Chapter 7 erases discharged debt. Chapter 13 restructures the debts into a repayment plan.
While many bankruptcy filers have student debt, very few succeed in discharging – erasing – the debt in Chapter 7.
Not being able to pay your monthly amount due does not alone qualify you to have your student loans erased through Chapter 7. Undue hardship must be proven.
Undue Hardship to Discharge Student Loans
Student loans are difficult, but not impossible, to discharge in bankruptcy. The payment of the debt must “impose an undue hardship on you and your dependents.”
Most bankruptcy courts use the Brunner Test to see if you meet the hardship threshold:
- You cannot maintain a minimal standard of living for yourself and/or dependents if you are forced to repay the debt.
- Your financial position is likely to continue for the repayment period of the loans.
- You have made good-faith efforts to repay the loans.
Some courts will not find hardship if you are paying for what it deems unnecessary expenses like cable TV. If the court does accept the argument for undue hardship, your student loan can be completely canceled. The court can also grant a partial discharge.
Benefits of Filing for Bankruptcy
A bankruptcy filing automatically stops collection actions on all your debts. Your creditors cannot ask about repayment until the bankruptcy case is resolved or until the court grants permission to start collecting again.
If hardship cannot discharge student loan debt, a bankruptcy filing can make the lender more likely to renegotiate a new payment plan. The forgiveness of other debts (credit card, medical, utilities, etc.) might provide the room in your budget to make your student loan payments.
Student Loans Discharged by Federal Government
Up to this point, Biden has taken a targeted approach to student loan forgiveness. There are two categories of borrowers that have benefitted.
- The Disabled. If you have become permanently disabled since completing school, you may qualify to have your loan discharged.
- Defrauded Students. Students who can prove that their college or university misled them into borrowing have been allowed to discharge their debt.
Although far from a discharge, President announced on Dec. 22, 2021, a third extension of the federal student loan payment forbearance and interest waiver. That buys time, but many borrowers are left to wonder how they will restart student loan payments should the forbearance be allowed to expire on May 1, 2022.
Experience in Discharging Student Loans
If hefty student loans are making it impossible to repay your debts, talk to one of our attorneys about your case. You will need an attorney from Scaringi Law with experience in arguing for undue hardship.
Filing for bankruptcy is a decision that is not made lightly. In addition to the financial consequences, there are also emotional ramifications. We understand the enormity of the decision, and we treat each client with respect and compassion. Our strategic and insightful counsel can evaluate the specifics of your case and recommend potential next steps.
To get started, schedule a free initial consultation with one of our attorneys. Call (717) 775-7195 or submit our online form.