Student Loan Bankruptcy: What you need to know

Student Loan Bankruptcy: It can be done, but it may not be your best (or only) option.

  • The student loan bankruptcy exception is changing
  • Want to avoid bankruptcy? There are several plans available that may make payments affordable for millions of student borrowers
  • To take advantage of new legislation, you must act before the end of October 2022

Keep reading if your student loan debt is causing financial problems and you’re thinking about bankruptcy. It may not be necessary, and your credit score will thank you.

Common Student Loan Issues

If you’re feeling the pinch of inflation and your credit isn’t great, you might think filing for bankruptcy and starting over is the best way to go. One sticking point may put you between the proverbial rock and a hard place: student loans. Talking with a student loan lawyer can help you identify your options. In many cases, you can get some relief without destroying your credit.

Inflation & Student Loan Bankruptcy

According to the Education Data Initiative, the average student loan payment in 2022 is $460. If you are at the beginning of your career, this could be a significant chunk of your monthly net income. If you live in places such as California and New York where living expenses are high, this amount could be the difference between a starter apartment and one in a nicer neighborhood. If you got your degree later in life, you may be starting over, salary-wise. This could result in suddenly living above your means, even if you didn’t make any other changes.

Student loans add complexity to some debt relief solutions, but you still might have several options.  

The Student Loan Bankruptcy Exception

Prior to 1976, bankruptcy could discharge student loans. However, when the U.S. Bankruptcy Code was introduced in 1978, it limited the ability to forgive education loans. Through the years, what can and cannot be discharged has changed, and requirements tightened. Statutes affect loans differently, depending on whether you had private or federal student loans.

The Higher Education Amendments of 1998 and the Bankruptcy Abuse Prevention and Consumer Protection Act exempted nonprofit lenders from bankruptcy by removing the phrase “of higher education.”  While education costs soared, student loans became harder to discharge in Chapter 7 bankruptcy. However, recent years have seen a softening in student loan bankruptcy exceptions.

Times and Perspectives Changed

By the mid-2000s, the price of a college education skyrocketed, and so did the efforts to collect on student loan debt. Legislators tried to crack down on defaulted and discharged loans. They increased wage garnishment and allowed up to 15% of retirement benefits and Social Security Disability to be taken to repay defaulted student loans. The Great Recession which started in 2008 and the economic uncertainty caused by COVID are among the variables that led to a change in perspective.

As of 2022, U.S. student loan debt topped $1.59 trillion. While most student loan borrowers have $25,000 or less in education debt, nearly 25% have student loan debt totaling at least $50,000. Releasing borrowers from student loan debt now involves a separate process. This increases the complexity of filing bankruptcy, but it may not be necessary, thanks to other options.

Today, you may be eligible for student loan bankruptcy if you meet one of these criteria:

  • You have a permanent disability
  • Your school closed during your enrollment period
  • You’re the victim of identity theft or institutional fraud
  • Your school engaged in misconduct
  • Your school closed within 120 days of your withdrawal
  • Your repayment would impose undue hardship

Potential Hardship Discharge

To have your student loan debt considered for discharge (wiped out), you must file a separate action, known as an adversary proceeding. The court determines if repaying your loans would impose undue hardship on you and your family. The requirements can be stringent, and less than half of those who file successfully have their education debt discharged.

If you file chapter 7, the court looks at the value of your assets. In Chapter 13, you can file an adversary proceeding for the student loan debt that remains at the end of the payment plan. If you have significant medical debt, are unemployed or vastly underemployed, you may win a hardship discharge.

Legislation regarding student loan debt changes frequently, and the process for filing bankruptcy can be long and invasive. In the end, it may not be the right step for you. You deserve better options.
October 2022 Deadline

For a small portion of student loan borrowers, bankruptcy is their best and only viable option. However, if you don’t meet the criteria, that’s not necessarily bad. Chapter 7 or 13 can raze your credit to the ground and starting over isn’t always the best solution.

How would you like to be able to make your student loan payments and still afford your mortgage, put gas in the car and food on the table? Depending on your current situation, you may be able to reduce your required payments to a manageable level. There are several types of payment plans available. Some are based solely on income, while others focus on specific job or industry types (e.g., healthcare, government employees, teachers).

Student loans are a hot topic with lawmakers. There is new legislation on the horizon that will take effect next year. However, you must be on specific payment plans to take advantage of its benefits. Get a free student loan review, talk to a student loan lawyer near you and offload some financial stress. Get started today and make 2023 a better year starting with taking control of your student loan debt.