Since 1978, the average cost of college tuition in the U.S. has increased by a shocking 900 percent, according to the Project on Student Debt. The Project on Student Debt also revealed that college seniors in the U.S. graduated with an average of $24,000 in student loan debt in 2009. In August 2011, student loan debt surpassed credit cards as the country's largest source of debt, nearing $1 trillion.
What is even more frustrating for new graduates is that a college degree is no longer a ticket to employment the way that it used to be. The Economic Policy Institute reported that college graduates' earnings have stagnated or fallen since 1978 and that unemployment has affected recent college graduates most acutely - doubling in the post-2007 recession.
In the face of the struggling economy, many people are hard-pressed to continue to make their monthly student loan payments and wondering what their options are. Some are strapped to the point of filing bankruptcy. However, those considering bankruptcy as an option for debt relief need to understand how difficult it is to discharge student loan debt in bankruptcy.
Chapter 7 Bankruptcy and Student Loan Debt
The general rule is that a borrower cannot discharge student loan debt in Chapter 7 bankruptcy; student loans differ from other unsecured debts in this respect. The 2005 amendments to the Bankruptcy Code made private student loans non-dischargeable along with federal student loans.
However, if a person can demonstrate to the court that he or she faces undue economic hardship in repaying his or her loans, the court may discharge those loans in a Chapter 7 bankruptcy discharge along with the debtor's other debts.
To have the court consider discharging student loan debt, the debtor needs to file a petition for an adversary proceeding. During the proceeding the debtor will need to demonstrate:
- The debtor cannot maintain a minimal standard of living for him or herself and his or her dependents if the debtor must repay the loan.
- The debtor's economic circumstances are likely to remain the same during the majority of the loan repayment period.
- The debtor made a good-faith effort to repay the loans.
The bar for showing the economic hardship necessary to justify discharging student loans is very high; few petitioners meet it. The court will often demand that the debtor have explored other options before petitioning for a discharge, such as going to the lender and trying to work out a repayment plan with more affordable monthly payments. Additionally, the court will rarely accept a petitioner's low-paying job as sufficient proof that the petitioner's economic situation will not likely change over the course of the loan repayment period. The court will be looking for additional circumstances that would prevent the petitioner from obtaining higher paying employment, such as a medical condition that limits a person's ability to work.
Chapter 13 Bankruptcy and Student Loan Debt
Those struggling to make student loan payments do have an additional option if they do not qualify for a Chapter 7 discharge of their student loan debts. They can consider filing for Chapter 13 reorganization bankruptcy and include their student loan debt within the Chapter 13 repayment plan. In doing so, the debtor is still making some payments on the debt but is not overwhelmed by the amount of the monthly payments. The benefit of this option is that the monthly payments of a Chapter 13 repayment plan are based on the income of the debtor. The debtor should therefore be able to afford the payments while still having enough for basic necessities such as food and housing. Creditors may not take collection actions against a person making payments on a Chapter 13 repayment plan, either.
While this option does not eliminate student loan debt the way that a discharge does, it does give a debtor time to become more economically stable without completely defaulting on his or her loan payments. Also, Chapter 13 bankruptcy does discharge some non-secure debt, thereby freeing up some of the debtor's income in the future to make payments on student loans.
The difficult economy and dim job prospects have many searching for options to help them with repaying student loan debt. Although it is difficult to completely discharge such debt in bankruptcy, filing bankruptcy still offers people a way to get on firmer financial footing so they can eventually repay their student loan debts more easily.
