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Student loan debts in bankruptcy

Last month, Business Insider ran a story indicating that student loan debt was driving a high number of bankruptcies. Citing a recent LendEDU study, it found that 32% of all consumers who file for Chapter 7 bankruptcy have a significant amount of student loan debt- on average, 49% of their liability was related to the cost of their education.

The cost of attending college has more than doubled since the 1980s. As a result, millennials have taken on a lot more debt than their parents did to acquire an education. According to Bernie Sanders, baby boomer generation could pay off four years of university by working 306 hours at minimum wage. Today’s graduates are looking at nearly 4,460 hours.

The LendEDU study highlights the serious effect of student loan debt on new graduates. When combined with the high cost of living today, these loans make it more difficult for graduates to save money. More than half of the indebted respondents to a Business Insider survey said that the additional education was not worth the price they paid in student loans and some are even leaving the U.S. to escape their debt.

How can bankruptcy help?

In general, student loan debt cannot be discharged in bankruptcy. That’s the bad news. The good news is that filing can make it easier for you to cope with a crippling student loan debt. For example:

  • A Chapter 13 filing can make it possible to repay a reduced amount over a three-to-five-year period.
  • Former students filing for Chapter 7 won’t be able to wipe away their student loans like a credit card debt or overdue utility bill, but by eliminating dischargeable debt, they are in a better position to tackle their student loans.

The only condition under which you may seek a student loan discharge is evidence of undue hardship. However, neither Congress, the Department of Education, nor the Bankruptcy Code has defined what constitutes an undue hardship, so individual bankruptcy courts take a case by case approach to each application, using one of the various standards applied in other cases.

  • Courts using the Brunner Test will want proof that if you made a good-faith effort to repay your loans, but continuing to do so will subject you to less than a minimal standard of living and your financial situation is not likely to change.
  • Some courts examine the totality of your circumstances, which include a review of your past, present, and probable financial resources in the future, your reasonable and necessary living expenses, and other relevant facts, such as whether or not you are disabled, how many payments you’ve already made on your loans, and your efforts to find gainful employment.

Declaring bankruptcy on your student loans is difficult, although not impossible, and filing for Chapter 7 or 13 can give you the breathing room needed to address the debt more effectively. A New York bankruptcy attorney will help you make the best decision when you’re worried about your future. If you are considering filing for personal bankruptcy, then contact Mr. Lutzky’s office at 718-329-9500 to schedule a free in-office initial consultation. Mr. Lutzky’s office is in the Morris Park neighborhood of the Bronx.

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