Struggling with student loans? Bankruptcy may help

March 13, 2013

Struggling with student loans? Bankruptcy may help

Article provided by Enderton & Mathews, LLC
Visit us at http://www.emlegal.net/

Since the recession began in 2008, many Americans have drastically reduced the amount of debt that they carry. However, there is one exception: student loans. According to the Federal Reserve Bank of New York, there is $956 billion in outstanding student loan debt--an increase of almost 20 percent from the beginning of 2012 until the end.

As it has been difficult for many students to find gainful employment following graduation, the unfortunate fact is that more of them are unable to repay their student loans. The number of student loan debts with balances over 90 days delinquent increased to 11 percent in the fourth quarter of 2012. As a result, many graduates turn to bankruptcyto relieve them of their debts. Unfortunately for almost all of them, bankruptcy will not be able to discharge their loans.

Bankruptcy's treatment of student loans

Student loans were not always nondischargeable in bankruptcy. Before the mid-1970s, student loans could be discharged just like other debt. However, in 1976, Congress changed the bankruptcy laws to require students to wait five years before their loans could be discharged.

In 1998, Congress toughened the law, making federal student loans nondischargeable in bankruptcy in order to protect taxpayers from discharged loans. In 2005, Congress further amended the law to make private student loans more difficult to discharge.

In theory, private student loans can be discharged, however only in very extreme circumstances. Under the bankruptcy laws, a private student loan can be discharged if the loan would impose an "undue hardship" on the borrower. Congress never defined what an "undue hardship" is, leaving the courts to come up with one. Although the definition of "undue hardship" can vary with each jurisdiction, in most cases, the borrower must show:
-The borrower has made good-faith efforts to repay the loan
-The borrower cannot maintain a minimal standard of living based on current income and expenses
-The borrower's current financial situation is likely to continue for most of the loan's repayment period

Since the law essentially requires the borrower to prove that he or she cannot pay the loan and likely will never be able to, it is very difficult to prove undue hardship. The Bankruptcy Court in Utah is one of the most stringent jurisdictions in allowing a discharge. The sad truth is that unless Congress decides to amend the bankruptcy laws or the Supreme Court changes the definition of undue hardship, student loans will likely continue to remain non-dischargeable.

Consult an attorney

Under the bankruptcy laws, student loans are practically impossible to discharge. However, other type of debt does not have the same restrictions under the law. Bankruptcy can be used to discharge or restructure debt such as credit cards and medical bills, freeing up funds to be used to timely make student loan payments. If you are struggling with student loan debt, an experienced bankruptcy attorney can explain your debt-relief options to you and recommend a course of action that would be best for your individual situation.