In March 2020, federal student loan payments were suspended through September 2020 and then the Biden administration extended that date through January 31, 2022. This moratorium affected nearly 42 million people and the Federal Reserve estimated that in the second quarter of 2021, Americans owed more than $1.7 trillion in student loans.1 Federal student loan borrowers have not had to make principal or interest payments on their loans for almost two years.
A spring 2021 survey found that two thirds of borrowers said it would be difficult for them to afford payments if they were to resume the following month.2 This brings up the question of whether bankruptcy can eliminate student loan debt.
While the popular belief is that student loan debt can’t be discharged through U.S. bankruptcy proceedings, that belief is not correct. Student loan debt can be discharged through bankruptcy, but student loans are significantly harder to get discharged than other types of unsecured debt.3 The American Bankruptcy Law Journal published a study in 2012 that found 39 percent of debtors won full or partial student loan discharges out of 207 bankruptcy cases in which debtors included their student loans.4
If your student loan debt is your only debt, filing for bankruptcy isn’t advisable. To the Department of Education this signals that you might have taken out a federal student loan with no intention of ever paying it back.5 Private student loans, financed through banks and other financial institutions, are easier to discharge through bankruptcy because private student loans don’t offer income-driven repayment (IDR) plans as is the case with federal student loans.
Courts often require debtors to obtain IDR plans for their federal student loans rather than discharging them in bankruptcy proceedings.
To have your student loans discharged you must first file for either Chapter 7 or Chapter 13 bankruptcy protection. A bankruptcy attorney can help you decide which option is best in your particular situation. A bankruptcy attorney must also file an adversary proceeding, or AP, which is an additional step that is necessary to have student loans considered for discharge through bankruptcy.
An experienced bankruptcy attorney will also provide advice on other factors to consider when filing for bankruptcy to discharge student loans. Foremost, declaring bankruptcy will affect your ability to secure credit for years to come. Also, because the court prioritizes your debts in a Chapter 13 bankruptcy it is possible that they may prioritize student loan debt as less important than your other debts. If the court does this, and lowers the size of your student loan payments, you would accrue additional interest on your student loan.
Keep in mind that the court may decide that if you can hire a bankruptcy attorney your financial situation is not bad enough for them to approve bankruptcy. Finding a lawyer that can take on your case for a low fee is one way around this dilemma. Many bankruptcy lawyers also offer no-cost initial consultations which can help answer many of your questions surrounding whether discharging your student loan debt through bankruptcy is a good solution for your situation.
Find out your debt relief options by contacting the bankruptcy attorneys at Hines Law located in the Boston area and serving residents throughout Massachusetts. Deciding which is the right choice for you depends on your debts, assets, and your income. Our lawyers understand the bankruptcy laws and can help guide you through the process, so that you avoid problems and benefit the full protection you deserve. Call for a Free Consultation today.
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1 Student Loan Payment Pause Extended to Jan. 31, White House Announces, by Lauren Egan, 8/6/2021
Link: https://www.nbcnews.com/politics/white-house/student-loan-payment-pause-extended-jan-31-white-house-announces-n1276230
2 What The Student Loan Moratorium Extension Means for You, by Cyrus Purnell, 8/23/2021
Link: https://www.forbes.com/sites/financialfinesse/2021/08/23/what-the-student-loan-moratorium–extension-means-for-you/?sh=7a420307164f