If you run up credit card debt buying a home entertainment center and find you cannot pay for it after a couple of years, you can eliminate that debt in bankruptcy. If you don’t pay your income taxes, after three years you can usually eliminate that debt in bankruptcy. You can even eliminate debt owed to a casino in bankruptcy.
But, if you borrow money to get an education and cannot afford the minimum payments after several years of underemployment or unemployment, that’s another matter according to Congress.
The federal bankruptcy code states that debtors may discharge a student loan only if repaying the loan would impose “undue hardship” upon them and their dependents. This applies to all student loans, regardless of whether the loans were obtained through government-sponsored lenders or private lenders. Most bankruptcy courts interpret “undue hardship” to mean an inability to repay the loan and maintain a minimal standard of living. However, your traditional notion of a minimal standard of living can differ greatly from (i.e. greatly exceed) what a judge may have in mind. Meeting this burdensome threshold also usually requires demonstration that the conditions imposing the hardship are unlikely to relent over time. Consequently, student loans rarely are discharged via bankruptcy.
All of this paints a bleak picture for our college graduates struggling with student loans, and I think it will only become more problematic in the years to come.
College seniors who graduated in 2009 carried an average of $24,000 in debt from student loans. That figure represents a 6 % increase over 2008 and continues a four-year trend of rising debt from student loans among college graduates, according to a recent report by The Project on Student Debt. In addition to the rising cost of education and the rising average student loan debt, unemployment rates for college graduates spiked from 5.8% to 8.7% in 2009, marking the highest annual college graduate unemployment rate on record and making it increasingly difficult for college graduates to pay their student loans back.
With student loan debt growing nationwide at a rate of $2,853.88 per second, it will surpass $1 trillion in 2012. Will student loan debt be the next subprime mortgage crisis?
Legislation proposed in the 111th Congress would have altered the dischargeabillity of student loans, but there is no guarantee that the newly-installed 112th Congress will contemplate such legislation in the future.
So, if you are experiencing financial hardship due to your student loans, speak to an experienced bankruptcy attorney and discover your options. If you don’t meet the “undue hardship” test, bankruptcy could still be useful by eliminating other debt and allowing you to redirect disposable income to those pesky student loans.