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Why Bankruptcy Doesn’t Always Erase Student Loan Debt

By Brenner Spiller & Archer, LLP | November 26th, 2018

Picture showing a college graduation ceremony.
Filing for bankruptcy can be a difficult and frustrating time in your life, and any obstacles can only increase stress. Our lawyers will always try to help guide you through the process, but don’t be surprised if you read that student loans may not count in your bankruptcy.

Student Loans in the US

The first US student loans were offered in 1840 at Harvard, back when annual tuition was an unbelievable $75 per year (equivalent to $2,024 in 2017). And don’t even get us started on textbooks.

Today, the debt from student loans is the second highest in consumer after mortgage debt. Unpaid student loans debt totals $1.3 trillion in the US. Most 2016 grads in New Jersey owe an average of $28,233, below the national average of $37,172.

Student loan debt has very exponential characteristics. In the mid 1990s, average debt was $9,000 ($15,300 adjusted), $17,500 in the mid 2000s ($23,300 adjusted), and over $37,000 today. 

Congress’s 1976 Legislation

Filing for chapter 7 or chapter 13 bankruptcy can be a smart way to get your finances in order and begin to repair your credit and/or repay your debts. But today, while large debts like mortgage, medical bills, and auto loans are dismissible, student loans are often not.

This is due to a passed legislation in 1976. Back in the 70s, there was concern that more students would default on their loans, so Congress passed a bill stating borrowers had to wait up to five years before being included in bankruptcy discharges (unless undue hardships could be proven).

The original bill only applied to federal student loans. Later, the timeframe was extended from five years to seven years, then was changed to remove a timeframe altogether. In 2005, lawmakers added private student loans to the bill.

When loans can be discharged

Today, student loan debt can only be dismissed during bankruptcy filing if the borrower can prove undue hardship. For example, if a borrower had been working toward a college degree, and a family member passed away with no life insurance but several dependents to take care of, the borrower could argue that having to earn for and care for the dependents can claim as an undue hardship.

Luckily, a bill was introduced in the House of Representatives that pushed to include student loans in bankruptcies. Any hard action on this bill won’t occur for a long time, but it’s a welcomed start to financial relief.

This article should not be taken as legal advice. If you’re considering bankruptcy or another legal debt relief option, you need to consult an attorney for guidance. If you’re in New Jersey and seeking legal assistance, we can help you.

Brenner Spiller & Archer, LLP is a New Jersey law firm that is dedicated to helping families find relief from the burden of debt and other financial woes. For more than 35 years, our bankruptcy lawyers have provided effective guidance on all debt relief matters to clients throughout Central and South Jersey.

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