Student Loans are Tough to Discharge in Bankruptcy
Student Loan Debt in the country has exceeded the credit card debt amount touching the figures of $1 trillion for the first time ever in the history of student debt. With the situation becoming intense, the US Government is on the lookout for coming up with a practical solution that would permanently deal with the problem of student loan defaults. After all, a quick solution to the problem is certainly required, as the issue is slowly crippling the economy leading the country to a tight and strict situation.
In moments of such crisis, if you are ever faced with the thought, as to why it gets difficult to discharge student loans, even with bankruptcy then, here is your answer.
Well, the answer to the question, in usual terms, lies best with the interest of the lenders and the nature of the good of society. Prior to getting onto the subject, let us have a look at the major types of loans available to borrowers.
Firstly, there is the secured loan that makes you sign a note while, borrowing money against an automobile or a house. Usually, the lender gains the security by offering you less than the actual value or financial worth of the particular property. Such an idea, on the other hand, opens the door towards less interest rate that equals the low risk associated with losing money, if the loan is not properly paid.
Secondly, there is unsecured debt like the debt on credit cards. Now, to balance the fact that some borrowers do end up being defaulters, even while being bankrupt, the lenders are permitted to charge interest rates that are higher in order to equal the fact. In general, society has no innate interest in keeping the rates of interest for credit cards low for the population, as it is comfortable to take off riskier loans with higher rates of interest.
Now, when it comes to student loans, society considers it good to make the loans available at a lower rate of interest. Since no such security is attached to the loan; the only way that is left to protect the interest of the lenders is to make the loan difficult to discharge, even during bankruptcy. Therefore, the particular fact that the loans are hard to get rid of provides the lenders the comfort of lending money to a group of individuals at reasonable interest rates. If the loans are ever allowed to be discharged, even in bankruptcy then, the lenders will surely charge higher rates of interest alongside cutting down the right of offering loans.
Well, keeping such consequences of ending up as a defaulter in mind, you must always think properly, prior to dealing with finance.
Student Loans are Tough to Discharge in Bankruptcy
A. Explanation of student loans:
Student loans are a type of financial aid that students can obtain to help pay for their college or university education. These loans are typically issued by the federal government or private financial institutions and must be repaid with interest after the student graduates or leaves school. In recent years, the cost of higher education in the United States has continued to rise, leading to an increase in the number of students who need to take out loans to cover the cost of their education.
B. Overview of bankruptcy:
Bankruptcy is a legal process that allows individuals, businesses, and other organisations to eliminate or repay their debts under the protection of the bankruptcy court. Bankruptcy can be filed under different chapters of the United States Bankruptcy Code, depending on the debtor’s circumstances and objectives. In general, bankruptcy is designed to provide a fresh financial start for individuals and entities who are struggling with overwhelming debt. However, not all debts can be discharged in bankruptcy, and the process can have long-term consequences for the debtor’s creditworthiness and financial future.
II. Student loans and bankruptcy:
A. Overview of student loan debt in the US:
The amount of student loan debt in the United States has reached historic levels, with over 44 million borrowers holding approximately $1.7 trillion in outstanding debt as of 2021. The average debt per borrower is around $37,000, with many individuals owing much more. Student loan debt has become a major financial burden for many Americans, impacting their ability to save for retirement, buy a home, or start a family.
B. Legal requirements for discharging student loans in bankruptcy:
While bankruptcy can be an effective tool for managing overwhelming debt, discharging student loans through bankruptcy is challenging. In order to discharge student loans, the borrower must demonstrate that repaying the loans would cause an undue hardship. The criteria for proving undue hardship can vary depending on the jurisdiction, but typically involve showing that the debtor cannot maintain a minimal standard of living if forced to repay the loans, that the hardship is likely to persist for a significant period, and that the debtor has made a good faith effort to repay the loans.
C. The different types of bankruptcy:
There are several different types of bankruptcy that individuals or entities can file for in the United States. The most common types of bankruptcy for individuals are Chapter 7 and Chapter 13 bankruptcy. Chapter 7 bankruptcy allows debtors to discharge most of their unsecured debt, including credit card debt and medical bills, but discharging student loans requires meeting the undue hardship standard. Chapter 13 bankruptcy involves creating a repayment plan for some or all of the debtor’s debts, including student loans, which may be partially discharged after completing the repayment plan. There are also other types of bankruptcy available for specific situations, such as Chapter 11 for businesses or Chapter 12 for family farmers and fishermen.
III. The undue hardship standard:
A. Definition of undue hardship:
Undue hardship is a legal standard that must be met in order for student loans to be discharged in bankruptcy. This standard is intended to ensure that only those borrowers who are truly unable to repay their loans are able to discharge them through bankruptcy. Undue hardship is typically defined as a significant and long-term financial burden that prevents the borrower from maintaining a minimal standard of living while repaying the loans.
B. How to prove undue hardship:
Proving undue hardship in a bankruptcy case can be challenging. To meet this standard, the debtor must show that repaying the student loans would cause an undue hardship, which may involve demonstrating that they cannot maintain a minimal standard of living if forced to repay the loans, that the hardship is likely to persist for a significant period, and that they have made a good faith effort to repay the loans.
C. The Brunner test:
The Brunner test is a three-part test that is commonly used to determine whether a borrower has met the undue hardship standard. Under the Brunner test, the debtor must show all of the following:
- That they cannot maintain a minimal standard of living if forced to repay the loans;
- That the hardship is likely to persist for a significant portion of the repayment period; and
- That they have made a good faith effort to repay the loans.
The Brunner test has been criticised for being too stringent, which has made it difficult for many borrowers to discharge their student loans in bankruptcy. However, some courts have begun to adopt a more flexible standard for assessing undue hardship, which may make it easier for borrowers to discharge their student loans through bankruptcy.
IV. Other options for managing student loans:
A. Loan consolidation:
Loan consolidation is a process in which multiple federal student loans are combined into one loan with a single monthly payment. This can make it easier to manage multiple loan payments and may also lower the borrower’s monthly payment by extending the repayment term. However, loan consolidation does not reduce the amount of debt owed and may result in the borrower paying more in interest over the life of the loan.
B. Income-driven repayment plans:
Income-driven repayment plans are a type of federal student loan repayment plan that adjusts the borrower’s monthly payment based on their income and family size. These plans can make it easier for borrowers to afford their monthly payments and may result in lower monthly payments, but they also extend the repayment term and may result in the borrower paying more in interest over the life of the loan. Some income-driven repayment plans also offer loan forgiveness after a certain number of payments have been made.
C. Loan forgiveness programs:
There are several loan forgiveness programs available to borrowers who meet certain criteria. For example, the Public Service Loan Forgiveness program offers loan forgiveness to borrowers who work in certain public service jobs, such as government or nonprofit work, after they have made 120 qualifying payments. There are also loan forgiveness programs available to borrowers who work in certain fields, such as healthcare or education. Loan forgiveness programs can provide significant relief for borrowers who meet the eligibility criteria, but they are often limited and competitive, and may not be available to all borrowers.
Other options for managing student loans may include deferment or forbearance, which allow borrowers to temporarily postpone their loan payments, and private loan refinancing, which involves refinancing existing student loans with a private lender. Each option has its own benefits and drawbacks, and borrowers should carefully consider their options and consult with a financial professional before making a decision.