Frequently, I have someone call me to inquire about bankruptcy because they cannot afford to pay their student loan debt. I explain to them that bankruptcy discharges student loans only if the debtor can demonstrate to the court what is called an “undue hardship”. While under the right circumstances, a debtor can prove “undue hardship”, it is a very high hurdle for most prospective debtors, and expensive Not only do you have to pay for the bankruptcy, you are required to file an adversary proceeding; that is, a lawsuit within the bankruptcy. To the extent that the lender opposes the discharge, this means all the elements of litigation- pleadings, discovery, court conferences, motions and trial. It adds up.
However, that does not mean that bankruptcy cannot be part of a strategy to deal with your student loan debt. Just as the average homeowner is not going to get out of paying her mortgage, the average student loan debtor is not going to be able to immediately walk away from her student loan debt. But, you can take steps to make the payments affordable so that you are not sued (if private loan) or subject to an administrative garnishment or social security intercept (if a federal loan).
How can bankruptcy help? Well, lets say you have $100,000 in student debt and make about $50,000 per year. You are single with no dependents. Your rent is high because rents are high in northern NJ. Your withholding taxes take 20-25% of your gross income. Utilities, cable, phone, food, car loan or lease and insurance,an occasional night out (the basics). Your budget is tight so you used the credit cards they sent you.
So you have $30,000 of credit card debt, about $5,000 of medical expenses that the insurance did not cover. Besides the basics, you are looking at about $500 in monthly payments for credit cards (just above minimums) the hospital (so they don’t sue you). And then you have to pay your student loans.
A standard repayment in this example is over $1000 per month. But Income Based Repayment ( IBR) and REPAYE are less than half that. Getting close. If somehow, you could get rid of some of that non-school loan debt, you might be in a position to afford the student loan debt.
A Chapter 7 bankruptcy could discharge the credit card and medical debts. That would free up over $500 per month. More importantly, those underlying debt are discharged. Gone forever.
When you come to Kevin Hanly, Esq. LLC for a student loan analysis, we look at your entire financial picture to arrive at a strategy to make your student loan debt more affordable. Most times that includes an income based repayment plan. Sometimes, it includes considering and maybe filing bankruptcy.
To get a better idea how bankruptcy works, you can check my bankruptcy website and blog at bankruptcy.kevinhanlylaw.com.