As young adults in Rockland County graduate from college and prepare to enter the working world, one of the biggest obstacles many face is paying off the loans they incurred to pay for college. For many people, their student loan balance reach into the high five figures, and some exceed $100,000. A debt of such magnitude on a borrower’s credit record can preclude access to loans that are necessary to enable the purchase of a home or an automobile. According to a recent study completed by the United States Department of Education, even bankruptcy offers little hope.
The study evaluated more than 400 responses from borrowers and lenders. A student loan can be discharged in a Chapter 7 bankruptcy only if the debtor can prove that paying on the loan would create “an undue hardship,” an evidentiary threshold that is virtually impossible is clear. The test is vague and is subject to differing interpretations by various bankruptcy courts. Experts familiar with the problem of student loans have made several recommendations for changing the Chapter 7 standards for discharge.
One of the first adjustments is to establish clear criteria for discharge of some loans for people in dire financial situations, such as living near the poverty line, disabled or providing care for an elderly or disabled person. A second idea is modifying the existing test for “undue hardship,” so that it is easier to meet and is uniformly enforced by bankruptcy courts across the country. A third recommendation is reducing the costs of bankruptcy court litigation by allowing students to submit evidence in the form of tax returns, affidavits, etc. without hiring lawyers to conduct discovery and fight the creditor. A fourth suggestion is to eliminate the availability of government repayment plans as a consideration in whether to discharge a debt.
Many of these changes will require congressional action, but nevertheless, advocates for change will continue to urge changes in this important part of the Bankruptcy Code. While as of right now discharging student loans through Chapter 7 bankruptcy is very difficult, this is not always the end of the story. A Chapter 7 bankruptcy filing can discharge many of a person’s other debts. A successful Chapter 7 filing can open up more income for the debtor that can be applied to student loans, thus easing the financial burden many debtors face.