Many debtors are being crushed under a mountain of student loan debt. For many debtors, student loan debt far exceeds more traditional debt like mortgages and credit cards.
Despite myths to the contrary, filing for chapter 7 bankruptcy can help with student loan debt. First, the attitude of the bankruptcy courts may be changing, and it may be easier to discharge student loans (particularly for older workers). Second, and most importantly, even if your student loan debt cannot be discharged or reduced, personal bankruptcy can discharge or reduce OTHER debt, which can make it easier to get out from underneath the debilitating financial weight of your student loans. Here is a quick summary.
In good news for debtors, in early 2020, a bankruptcy court ordered the discharge of over $220,000 worth of student loans. See Forbes report here. The case has been seen as an example of the changing attitudes of bankruptcy court judges toward the dischargeability of student loans. This case was not the only example, either. Without the same media fanfare, a similar result was reached in an Oregon bankruptcy case from late 2019. See In re: Smith, 608 BR 236 (D. Oregon September 17, 2019) (about $50,000 in student loans held to be dischargeable).
Under the Bankruptcy Code, in order to obtain discharge (or reduction of) student loans, a debtor must demonstrate that NOT granting a discharge “… would impose an undue hardship on the debtor and the debtor’s dependents.” See 11 U.S.C. § 523(a)(8). A separate filing must be made with the bankruptcy court asking for a determination of “undue hardship.” To prevail, three legal elements must be shown:
- The debtor cannot maintain a “minimal standard of living” based on income and expenses
- The debtor’s hardship is likely to continue into the indefinite future and
- The debtor must have made good-faith efforts to pay the student loan(s)
In the two cases mentioned above, the judges made a determination of “undue hardship.” One factor discussed was the age of the debtors. The “indefinite future” element becomes more pronounced as debtors get older.
Discharging Other Debts can Help Manage Student Loan Debt
Even if a debtor cannot prevail on a determination of “undue hardship,” a personal bankruptcy can still provide significant debt relief. Bankruptcy will help reduce non-student-loan debt which helps in several important ways.
First, reducing other debt makes it easier to make payments on student loans. More money is available since no payments are required on discharged debts.
Second, reducing other debt helps with what is called the “debt-to-income ratio” which is used by lenders and credit card companies to evaluate whether to extend new credit and at what interest rates. A lower debt-to-income ratio allows for a lower interest rate. A combined lower debt-to-income ratio and a lower interest rate will increase a debtor’s ability to refinance the student loans which can make them more affordable.
Finally, reducing other debt helps debtors repair their credit scores. Reducing debt means that debtors are more likely to be able to afford payments and to make payments on time. Credit scores are enhanced when borrowers are able to make payments on time. In the long term, this helps borrowers to obtain credit at more affordable interest rates. This will also help with any future effort at refinancing.
Contact Our Experienced Bankruptcy Attorneys Today
If you are drowning in debt, contact Bankruptcy Law Center today. Our law firm can help explore options. If you need debt relief and are considering filing bankruptcy, we have the experienced bankruptcy attorneys that you need.