What to Know About Student Loan Debt and Bankruptcy

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There probably isn’t a law student alive who has not, at least for a brief moment, wondered whether they could file for bankruptcy to get out of their student loan debt. Most law school graduates leave school with an albatross of debt — common figures tossed around at the bar exceed six figures. And while everyone’s mental image of a lawyer is a rich guy in a pinstripe suit with a Porsche, most lawyers don’t make anywhere near that money, especially at the beginning of their careers. And yet, despite being very well educated and likely able to file a bankruptcy petition on their own, almost none of them do. 

Why? Is it because of the myth that student loan debt is all-but-impossible to discharge in bankruptcy — a myth that a judge recently noted was perpetuated by the courts and believed even by many lawyers?

How about some other good myths about bankruptcy? Like “I can totally rack up credit card debt now because I’m going to file soon.” Or “bankruptcy will give me a clean slate — no debt whatsoever.” And of course, “bankruptcy will ruin my credit and financial life forever.”

How true are these myths? Let’s take a closer look:

Student loan debt is hard — but not impossible — to discharge

According to recent research, about a quarter of a million people list student loan debt in their bankruptcy filings each year. And yet 99% of those people give up on discharging that debt through bankruptcy.

That’s incredible, right? That’s almost statistical proof that it is impossible to eliminate student loan debt.

Except it isn’t. In an opinion that made headlines everywhere at the beginning of 2020, a bankruptcy judge in New York discharged over $200,000 in student loan debt for a Navy veteran and law school graduate. While he had attempted to pay that debt off and had kept up with his payments for years, numerous career setbacks, recessions, and other issues had caused his debt to balloon and he eventually fell so far behind that he couldn’t keep up with payments.

In her decision, Judge Cecillia G. Morris noted that there is a prevailing myth — believed even by most attorneys — that student loan debt is not dischargeable in bankruptcy. Common statements you may hear are that you can only get the debt discharged if you’re “disabled” or have some other astronomically difficult and impossible-to-prove circumstance. In a way, this myth has become a self-fulfilling prophecy in the courts over the years, as judges have taken a standard called the Brunner test, which requires a showing of an “undue burden” caused by the debt that makes it difficult to meet a minimal living standard, and applied that test more and more harshly until pretty much nobody met it.

Judge Morris issued a much more reasonable decision and called the attorneys and judges in the system to task, noting that the misinterpretation of the Brunner test has set a “quasi-standard of mythic proportions so much so that most people (bankruptcy professionals as well as lay individuals) believe it impossible to discharge student loans.” She recited the original language of Brunner before outlining a much more lenient and reasonable interpretation of the test.

While only time will tell whether other judges follow her lead, or whether her decision is the exception, the first person to discuss the dischargeability of your student loan debt is with a bankruptcy attorney. Further, it stands to reason that a larger amount of student loan debt is dischargeable than the less than 1% of people who had the courage to fight back through the system and pursue a discharge of their student loan debt — the myth of non-dischargeability seems to be scaring off virtually anyone from trying, even though the law says that it should be possible.

Spending sprees and fraud are too obvious to work

Much like a kid with his dad’s credit card, it can be tempting to rack up a ton of charges knowing that that debt will be simply taken care of. After all, if you are going to go through the effort of filing bankruptcy, why not treat yourself a little bit anyway, since all that debt will soon be gone?

That trick is way too obvious to actually work. The courts are not ignorant of this temptation. They will look back at your spending and if they notice a sudden surge in spending, especially if that spending is on frivolous things, they will likely hold that debt to be fraudulent and not discharge it through bankruptcy. In the end, you could find yourself with credit ruined by both the bankruptcy filing and the massive amount of debt that you incurred trying to score a few goodies that you thought you would never have to pay back.

Bankruptcy is a guaranteed clean slate

While bankruptcy is intended to, and does, eliminate debt so that you can get a fresh start on your financial future, it is important to note that there are some debts that you cannot discharge through bankruptcy. For example, if you have a large amount of child support or spousal support arrears, the court is not going to make those go away. Those will continue to haunt you, even if you file bankruptcy.

There are other debts that are impossible to discharge, such as debts that arise from injuring someone while driving drunk. Student loan debt, as we just discussed, can be very difficult to discharge. And tax debt is so fraught with rules that you almost need a law degree and a tax degree to understand all of the intersecting timelines and requirements to fight that debt.

Before jumping to the conclusion that a bankruptcy filing is a right move for you, and that you will emerge with no debt whatsoever, consult with an experienced bankruptcy attorney about your filing, existing debts, and your path forward. They will discuss with you which debts are easier to discharge, which will be a challenge, in which will be virtually impossible.

Bankruptcy will ruin my credit forever.

Well, it ain’t good bub. Common sense will tell you that after you file bankruptcy, and it appears on your credit report, that banks will not be lining up to hand you a platinum card. And that bankruptcy will likely stay on your credit report for the better part of a decade.

But, that does not mean your credit will be beyond redemption. You may have to start small, with a secured credit card, where you have a small credit limit backed by a deposit paid to the credit card issuer. (Yes, you pay them to “lend” you the money that you gave them.) Once you’ve shown that you can handle that responsibly, banks will be more willing to issue you traditional credit cards. You will have to take this step-by-step, over the next few years, before your credit starts to recover significantly.

If that sounds bad, don’t forget the upside of bankruptcy: it protects many of your assets, including your home, while eliminating much (if not all) of your unsecured debt, such as credit card debt. It can help you to secure your essentials, such as your home and car while giving you a path forward financially without having to constantly try to keep up with high-interest rates and debt collector calls. There is a price for that upside – a drastic hit to your credit that will last a few years. But it will not last forever, so long as you approach your post-bankruptcy financial life responsibly.

If you are considering bankruptcy, but are scared by the advice of others about the consequences of bankruptcy, or how certain debts “can’t” be eliminated, the best thing you can possibly do is to discuss the matter with an experienced bankruptcy attorney first. They can dispel a lot of these myths, and give you the information you need to decide whether bankruptcy is right for you. Get started today by filling out our contact form and will put you in touch with a local bankruptcy attorney who can get you the knowledge you need to make the right decision for you.

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