Student Loan Crisis and Bankruptcy

March 27, 2012

student loan.jpgMany people in Northern California are burdened by the cost of student loans and it continues to create a drag on the economic recovery. While there have been efforts by the federal government to help borrowers with home loans that are upside down, there has been no help for borrowers that are drowning in student debt. According to recent estimates by U.S. officials at the Consumer Financial Protection Bureau, the amount Americans owe on student loans is far higher than earlier estimates and could lead some consumers to postpone buying homes and making other purchases, potentially slowing the economic recovery.

If you have student loans that you are unable to afford Chapter 7 bankruptcy or Chapter 13 bankruptcy may help you to discharge other debts and give you the ability to repay the student debt or to reorganize your debts. In some cases, if you can show financial hardship, you may be able to discharge the student loan debt in bankruptcy. If you cannot discharge the debt, in a Chapter 13 bankruptcy you may be able to lower the payments to an amount that you can afford.

The total outstanding student debt appears to have surpassed $1 trillion late last year, according to officials at the Consumer Financial Protection Bureau (CFPB), a federal agency created after the financial crisis. The CFPB estimate is based on a survey of private lenders, as opposed to other estimates that rely on a sampling of consumer credit reports. According to the CFPB student debt is rising because of the surge in Americans going to college in recent years to escape the weak labor market and tuition increases causing students to take out bigger loans.

In addition, the interest costs on older loans are climbing as borrowers fall behind on payments, reflecting mounting financial strains, according to the CFPB. The New York Fed data shows that as many as one in four student borrowers who have begun repaying their education debts are behind on payments. As more people go to college and assume bigger loans for education, they may take longer than previous generations to buy a house or get married. It could take longer for heavily indebted graduates to save money for a down payment on a home, or it could be harder for them to qualify for mortgages.

Student loans are generally nondischargeable in bankruptcy unless you can show that repayment would impose an undue hardship on you and your dependents. An undue hardship determination is generally based on a three-part test developed by the Courts. A student must show that based on current income and expenses the student cannot maintain a minimal standard of living for the student and the student's dependents if forced to repay the loan. That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period. The student has made a good faith effort to repay the student loan. The additional circumstances refer to something beyond the mere current inability to pay. The circumstances must be exceptional, but only in the sense that they demonstrate insurmountable barriers to the student's financial recovery and ability to repay the student loan now and for a substantial portion of the loan's repayment period. Examples are serious mental or physical disability of the student or student's dependents that prevents employment or advancement, the student's obligations to care for dependents, lack of, or severely limited education, poor quality of education, lack of usable or marketable job skills, underemployment, maximized income potential in the chosen educational field and no other more lucrative job skills, limited number of years remaining in work life to allow repayment of the loans, age or other factors that prevent retraining or relocation as a means for paying the loan, lack of assets that could be used to repay the loan, potentially increasing expenses that outweigh any potential appreciation in the value of the student's assets and/or likely increases in the student's income. If these conditions apply then you can discharge your student loan in bankruptcy.

If you are worried about filing for bankruptcy and what impact it could have on your ability to obtain a student loan in the future, a governmental unit that operates a student grant or loan program, and any individual, partnership, or corporation engaged in a business that includes making loans guaranteed or insured under a student loan program, may not deny a grant, loan, loan guarantee or loan insurance to a person that is or has been a debtor in a bankruptcy case.

If you are having problems paying a student loan or other debts, bankruptcy may assist you. You should consult with an attorney. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.