- While bankruptcy can have negative connotations, it can be an important strategy for consumers in difficult financial situations — it gives them the opportunity to start fresh, free of different types of debt.
- However, student loan debt can be almost impossible to discharge when you file for bankruptcy — and almost one-third of filers have student loan debt. On average, student loan debt is almost half of the debt filers carry.
- A new bill, the Student Borrower’s Bankruptcy Relief Act of 2019, would get rid of the part of bankruptcy code that makes it so difficult to discharge student debt.
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Despite the negative connotations, bankruptcy can be an extremely resourceful strategy for consumers that have dug themselves into untenable financial situations.
Though the filer may lose valuable possessions in the proceedings, bankruptcy offers a fresh start to one’s financial life, free of things like credit card or medical debt.
But that reset button is not a possibility if the bankruptcy filer carries student loan debt, which is essentially impossible to discharge in bankruptcy despite being the second largest class of outstanding consumer debt in the US behind only mortgage debt. For reference, there is currently $1.52 trillion in outstanding student loan debt.
Nearly one-third of bankruptcy filers also carry student loan debt, which is virtually impossible to discharge
Of the 1,083 unique bankruptcy cases that were provided to LendEDU for analysis, 32% of them involved student loan debt. In other words, 32% of consumers that attempted to discharge their debts in bankruptcy also carried student loan debt, which will almost surely linger on even after all other debts have been successfully cleared.
For reference, Upsolve works with consumers to file for Chapter 7 bankruptcy, a process that can get quite tricky, and the company’s success rate in getting debt successfully discharged is 98%. That success rate involves most forms of debt such as that from credit cards, mortgages, and auto loans, all of which are relatively easy to have discharged in bankruptcy.
The success rate does not, however, include student loan debt because the process is so cumbersome and requires specialized attention that Upsolve informs users to not use the company’s services.
So, for one-third of consumers that are looking to start anew when it comes to their personal finances, their struggle with debt will continue even after their other debts have been discharged in bankruptcy.
And it turns out that struggle will be quite arduous, as it was found that student loan debt comprises a significant portion of this cohort’s total debt.
On average, student debt makes up half of total debt for bankruptcy filers that carry it
For the 32% of bankruptcy filers that carried student loan debt, student loans made up 49% of their total debt on average.
This is the most concerning datapoint from the entire report; even if those that carry student loan debt get all of their other debts successfully discharged in bankruptcy, they will still be on the hook for essentially half of their debt.
The purpose of bankruptcy is to help individuals with financial hardship clear their debt so they can begin recovering without having to worry about making large monthly payments toward repayment that will drain their bank accounts.
But this process is rendered partially useless for those consumers that carry student loan debt because it is so difficult to discharge in bankruptcy — in addition to the fact that student debt typically makes up the largest portion of their debt.
In these instances, student debt-ridden consumers are not getting financial restarts through bankruptcy, but a continuance of their issues with no end in sight as long as those student loan payments keep commanding an untenable portion of their income.
But luckily, recourse may be in sight for people in this situation.
Help could be on the way from Washington, DC
Recent developments on Capitol Hill may prove to be valuable for those consumers that are considering bankruptcy due to struggles with debt, especially that from student loans.
In May, Senator Dick Durbin (D-IL) introduced the Student Borrower’s Bankruptcy Relief Act of 2019 to Congress. The bill was cosponsored by leading Democratic presidential candidates including Bernie Sanders, Elizabeth Warren, and Kamala Harris.
If the proposed legislation passes, it would eliminate the current part of the bankruptcy code that makes private and federal student loans non-dischargeable unless “undue hardship” is proven. As it stands today, proving undue hardship is notoriously difficult, if not downright impossible; the borrower in question must prove that they cannot meet a minimal standard of living if they continue on with student loan repayment.
While it remains a question if this bill will survive the rigors of Washington, DC lawmakers, it would treat student loan debt the same as all other forms of consumer debt during bankruptcy proceedings if it is indeed passed.
Based on the data detailed in this article, lawmakers would do well to put aside party differences and pass this legislation that would put student debt at the same standard as all other forms of debt during the bankruptcy process — it would be of the utmost importance for consumers seriously considering bankruptcy as recourse to their financial woes.