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The challenges of student loan debt in bankruptcy

| Nov 10, 2020 | Chapter 13, Chapter 7 |

For many, filing for bankruptcy is the best solution to overwhelming financial problems. Filing for Chapter 13 can help people to arrange debt repayment, while a Chapter 7 filing can allow them to start over altogether.

However, it is important to realize that in either case, student loan debt is rarely forgiven. According to a recent New York Times article, of 884,956 personal bankruptcy cases filed in 2015, only 674 were seeking student debt relief.

Recent analysis shows that student loans are the second largest source of household debt, trailing only mortgages. The average balance on these loans is $28,950, not including parental contributions. Co-signing loans can also put parents at financial risk if their grown child is unable to meet payments.

Young people saddled with debt at the outset of their careers are already limiting their ambitions when the shadow of repayment drives their job searches. Many end up trapped in an endless cycle of repayment plans with ballooning interest rates.

Passing the undue hardship test

To shed student loan, borrowers must show that the student debt is an “undue hardship”, a standard interpreted differently by different judges. Many courts use the Brunner test to determine this standard:

  • Is the applicant in poverty, unable to maintain a minimal standard of living for himself and his dependents? Determining factors include applicant’s income and expenses, education, health and other debt.
  • Will this condition persist through the duration of the loan?
  • Has the applicant made good faith efforts to repay the loan and has he been unable to due to job loss, illness or injury?

Finding ways to resolve student loan debt

Student loans are very difficult to wipe out in a Chapter 7 bankruptcy. In New Jersey, bankruptcy filers must include a separate document, the “Complaint to Determine Dischargeability”, to petition the court as part of the bankruptcy proceeding.

It is best to read the fine print on this option, however. Many private student loans include a universal default clause that is triggered by a bankruptcy filing, making them immediately due in full. Even bankruptcy for debt unrelated to the student loans can trigger the clause.

Chapter 13, on the other hand, can offer debt relief by reorganizing debt repayments over a period of time, as well as offering partial loan forgiveness for some debts not including student loans.

In the current economic environment, it is important to examine the options available for debt relief in New Jersey through deferred payments or forbearance. Getting advice on bankruptcy options is also important in helping you find a path forward.