I am curious if anyone has had success in having their Student Loans discharged through Bankruptcy. I know it is difficult to do, but it is possible? I’m looking at not being able to start a family, or buy a house, for the next 20+ years due to my student loan debt. (I’m 30 now).
I have just over $110k in Student Loan debt, and just under 18k in CC debt. I make less than 42k a year at my job, and am finding I am struggling being able to make payments, while paying for rent, utilities etc.
Thank you in advance for any input I may receive. And again, I know it is difficult to have this student loan debt discharged.
Doesn’t this just break your heart? Really, a person who is 30 years old is debating whether or not to start a family because of student loan debt. And yet, this feeling is SO common these days. I can’t tell you how many young couples I meet who are afraid of getting married and starting families because they are worried about what student loan creditors will do to them. They worry that they can never own a home or acquire retirement savings and that future wages will be garnished forever. Something is seriously wrong in a country where young couples are afraid to start and expand families because of student loan debt.
“Does anyone have success in discharging student loan debt?”
The answer is almost no one has success in discharging student loan debt, and almost no one even bothers try. Under current bankruptcy law, student loans may not be discharged in bankruptcy unless paying such debts would impose an undue burden on the debtor.
The Nebraska bankruptcy court applies a Totality of the Circumstances Test to determine whether student loans may be discharged. The court will look at these factors when reviewing an application to discharge student loan debts:
- Total present and future incapacity to pay debts for reasons not within the control of the debtor;
- Whether the debtor has made a good faith effort to negotiate a deferment or forbearance of payment;
- Whether the hardship will be long-term;
- Whether the debtor has made payments on the student loan;
- Whether there is permanent or long-term disability of the debtor;
- The ability of the debtor to obtain gainful employment in the area of the study;
- Whether the debtor has made a good faith effort to maximize income and minimize expenses;
- Whether the dominant purpose of the bankruptcy petition was to discharge the student loan; and
- The ratio of student loan debt to total indebtedness.
The problem I see with this young person’s situation is that he or she is not married, there are no dependents, and he or she earns a decent income and has no apparent disabilities. Given those facts alone it is doubtful the loans would be discharged. In addition, it appears that no application for the income-based repayment plans offered by the US Department of Education has been made.
Under an income driven repayment plan, a borrower must pay what they can afford to pay over a 10 to 20 year period of time. At the end of the payment program the unpaid portion of the student loans are forgiven.
Until a borrower has applied for an income-based repayment plan, bankruptcy courts are extremely reluctant to grant a discharge of the student loan.
The real problem: Credit Card Debt.
The real issue for this debtor is the $18,000 of credit card debt. That type of debt is dischargeable in bankruptcy and the debtor appears to qualify for Chapter 7 relief based on the income being below $42,000. I suspect this debtor is paying his or her credit cards but is deferring student loan payments, and that is exactly the opposite of what should be done.
The likely best option for this person is to wipe out the credit card debt in Chapter 7 and then to enroll the student loans in an income based repayment plan. Life doesn’t wait, and at age 30 the time to start a family is running out. The student loans will be a burden, but they will be eliminated if a 20-year debt forgiveness program is started today. What is critical is to also start retirement savings through a 401(k) savings plan or an Individual Retirement Account while student loans are being paid. And the presence of $18,000 of credit card debt makes that type of savings very difficult to achieve, so a hard examination of bankruptcy options is advisable.
Around the Corner Thinking
When it comes to money there is a tendency to engage in “around the corner” thinking. As soon as I solve this problem then I can start to save. As soon as I get around that corner I can begin to plan for the future. The problem is, as soon as one problem is solved another appears, and so we are constantly trying to get around one corner after another and never really start to achieve our financial goals. Enough! Start achieving your financial and personal goals today. Start saving for retirement today. Start saving for the home down payment today. And when you are 30 years old, start that family today.
When you are trying to climb a mountain you need to reduce the weight on your back. This debtor needs to take off 18k of credit card debt off their back so they can reach life’s summit.
Image courtesy of Flickr and StacyZ aka Adore_One