How Student Debt Limits the “Fresh Start” of Chapter 7 Bankruptcy

Is Chapter 7 bankruptcy currently the best decision in a situation in which a large percentage of debt is made up of student loans? A recent article in Diverse Education highlighted the fact that it is often difficult to have student loans discharged in Chapter 7 bankruptcy, and that a large percentage of debtors with student loan debt do not actually end up with the financial “fresh start” that liquidation bankruptcy typically promises. As the article points out, for those debtors with student loan debt who recently filed for bankruptcy, on average student loan debt made up about 49% of the debt. For a majority of those debtors, student loan debt remained after the Chapter 7 bankruptcy discharge.

Given that student loan debt is making up a larger percentage of debt in liquidation bankruptcy cases and frequently is not being discharged, consumer protection advocates are asking whether Chapter 7 bankruptcy can really provide a “fresh start” without a change to the bankruptcy rules concerning student loan debt.

Many Debtors Have Almost Half of Their Debt Remaining After a Chapter 7 Bankruptcy Discharge
The article discusses a recent study report issued by LendEDU, which included data from Upsolve, a nonprofit focused on low-income consumer bankruptcy cases. That recent report demonstrated that the alleged “fresh start” promised by a liquidation bankruptcy more and more frequently is not in fact providing many debtors with a fresh start when a large percentage of their debt comes from student loans. As one of the authors of the report explained, “one-third of these bankruptcy filers can have almost all of their debt discharged but have nearly 50% of the total debt remaining to be paid.”

As that author of the report clarified, such a situation “does not sound like a financial restart, [but] rather a continuance of the debt-ridden life that creates and exacerbates so many problems.” When a person files for Chapter 7 bankruptcy, only eligible debt can be discharged. In other words, any debt that is not eligible for discharge remains even if other debts are discharged. Accordingly, when student loan debt is not discharged, a debtor can end up with the worst of both worlds: the limitations or cons associated with filing for consumer bankruptcy, along with the need to continue paying high debts for student loans each month.

Student Loan Debt Needs to be Addressed
For most debtors without student loan debt, Chapter 7 bankruptcy comes with enormous benefits. For those debtors, liquidation bankruptcy can indeed provide a “financial restart,” allowing the debtor to discharge most if not all of his or her debts. However, until student loan debt is easier to discharge in bankruptcy, many consumer protection advocates are concerned about debtors’ ability to thrive after Chapter 7 bankruptcy.

While it is possible to discharge student loan debt in bankruptcy, it can be difficult to do so. As the article highlights, the debtor usually need to show that continuing to pay student loans would constitute an “undue hardship,” and must pass what is known as the Brunner test to prove “they can’t meet a minimal standard of living if they keep repaying their student loans.” In addition, debtors must prove that they have made a good faith effort to repay student loans in order to be eligible for a discharge.

Illinois Senator Dick Durbin, along with other senators, have proposed legislation that would change the way student loans are treated in bankruptcy.

Contact an Oak Park Bankruptcy Lawyer
For now, we need to wait and see if Congress takes steps to change the way student debt is handled in bankruptcy cases. In the meantime, you may be able to obtain relief by filing for Chapter 7 or Chapter 13 bankruptcy. An experienced Oak Park bankruptcy attorney can discuss your situation with you. Contact the Emerson Law Firm today.



See Related Blog Posts:

Debt Collection Practices and Unlimited Texting: Will Consumers Face Harassment?
What is the Difference Between Chapter 11 and Chapter 13 Bankruptcy for Consumers?

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