Can a bankruptcy help with my student loans?
In some cases, bankruptcy may help a debtor in spite of demanding requirements for the discharge of student loans
Too many bills and not enough income may force you to consider a bankruptcy filing. For a great number of debts, a bankruptcy discharge will eliminate your personal obligation to repay the debt and allow you to move on with your life.
In recent years, with the financial and mortgage crisis and the Great Recession that they left behind, many New Mexicans lost their jobs and often their homes. Bankruptcy filings peaked and many were able to begin again to rebuild their economic lives.
Of course, bankruptcy cannot eliminate all debts. Some taxes, child support and spousal maintenance cannot be discharged in a bankruptcy. And one area of large concern for many is the subject of student loans.
As higher education has become more expensive, the ability to work and pay tuition has become more difficult. Students have relied more on the use of loans to fund their education and unfortunately, this coincided with two substantial factors that make dealing with those loans difficult.
A bad economy
Many recent graduates in the last decade have had the misfortune of arriving during the worst of the Great Recession or its aftermath. In addition to depressing the overall economy severely, the recession also caused the restructuring of many businesses and has led to a significant downturn in hiring and employment.
This has meant that many college graduates who would have reasonably expected to have found work with a white-collar job were now lucky to find any job, and often had to resort to working part-time jobs in retail or food service to pay their rent.
Congress restricts student loan discharge in bankruptcy
At one time, student loans could be discharged like most other debts. In the 1970s, Congress became concerned that some students were "gaming" the system by discharging their loans shortly after graduation.
Despite practically no evidence of this practice, Congress began to restrict the ability of graduates to discharge their loans. Finally, in the last decade, Congress eliminated the option almost entirely.
It left one narrow option, called undue hardship, which it did not define. The courts provided a definition back in the 1980s, which made receiving a discharge very difficult. They created a three-part test that essentially demands a debtor to prove they will never be able to improve their earning capacity in order for the court to order a discharge of their student loans.
Recently, the U.S. Supreme Court declined to take a case involving a man with $260,000 in student loan debt. He had failed the bar exam twice and was living with his mother. Why the Court refused the case is unknown, but it means there will continue to be uncertainty in the definition of undue hardship.
What can you do now?
If you speak to a bankruptcy attorney and they review your situation and suggest yours would not be a good candidate for an undue hardship case, you may still have options. If you are employed and have other debts in addition to your student loans, a bankruptcy discharge of those debts could make your student loan repayment more manageable.
If you have more moderate student loan debt, by discharging credit card debt or other loans or even excessive medical bills, you may be able to assemble a repayment strategy that would allow you pay your student loans without leaving you virtually destitute.
A bankruptcy attorney can discuss your particular circumstance and explain the differences between Chapter 7 and Chapter 13, and suggest which type would best serve your needs.