Oh, but you can. Don’t be misled. There are a few conditions, but it IS possible to rid yourself of burdensome student loan debt. For some, the debt is so great that they have considered filing for bankruptcy protection. That won’t do it. We all know that not even a bankruptcy filing can erase student loan debt, right? Read on….
Americans Carry $1.6T in Student Loan Debt
About one-in-six adult Americans currently has student loan debt. The total amount of student loan debt carried by Americans reportedly reached $1.6 trillion last summer.
This eye-popping number is related to the rising tuition costs for higher education. Data from the Department of Education National Center for Education Statistics shows that approximately 46 percent of full-time undergraduate students were awarded student loans to help pay for their education.
The average loan amount has reportedly increased 35 percent since 2000, after adjusting for inflation. During that same time period, the number of students who were awarded student loans has only increased by about five percentage points.
For the 2016-2017 school year, the average student loan was about $7,200.
Students at private non-profit institutions typically carry more student loan debt than students at public institutions, but once they graduate, they are more likely to repay their debts faster than those who graduate from public institutions.
Student loan debt reportedly outgrew credit card debt and auto loan debt from 2009 to 2010, and student loan debt is currently 70 percent greater than credit card debt in America.
Can You File Bankruptcy on Student Loans?
Reset Button, a legal startup founded in February 2020, launched its business shortly after a New York federal court ruled that student loan bankruptcy law does allow the discharge of student loan debt in cases of “undue hardship” and implemented a broader understanding of “undue hardship” than previous courts.
The court ruled that a Chapter 7 debtor could discharge $221,000 in outstanding student loan debt.
The so-called “Brunner test” has been used in most U.S. bankruptcy courts to determine whether or not a person’s student loan debt imposes “undue hardship.”
This “Brunner test” has been historically difficult to overcome for the majority of people who litigate their student loan debt. Consumers believed the test was insurmountable and that it was nearly impossible to discharge student debt.
However, Reset Button cofounder Jason Iuliano says that bankruptcy courts have discharged student loan debt in almost half of the bankruptcy cases in which the debtor asks for student loan relief.
To discharge student loan debt in bankruptcy, the borrower must file an adversary proceeding, which is basically a civil lawsuit, against either the lender or the debt collector.
According to Iuliano, about 60 percent of debtors who file the lawsuit will attain a settlement in their favor. The student loan debt relief from this settlement could reduce the loan principal up to 80 percent or significantly reduce the interest rate.
Reset Button is trying to raise awareness that it is possible to unload student debt during bankruptcy. The company works by connecting consumers with student loan bankruptcy attorneys who can help them discharge their student loan debt when they file bankruptcy.
‘Undue Hardship’ Misconceptions
To discharge student loan debt, debtors typically had to prove they were experiencing “undue hardship” that prevented them from currently being able to pay back the loan, that there would not be a change in circumstance to allow them to pay the loan back in the future, and that they have made every effort to pay their loans in the past.
In January 2020, a New York federal judge ruled that more than $221,000 in student loan debt could be discharged under chapter 7 bankruptcy.
In that case, Kevin Rosenberg took out student loans beginning in 1993 for his undergraduate degree. After serving in the U.S. Navy for five years, he took out additional student loans to attend law school.
After graduating law school in 2004, he consolidated his loans. As of April 2005, he held about $116,000 in student loan debt, an amount that surpassed $220,000 by 2019. During this time he left his employment at a law firm and became an entrepreneur.
A number of circumstances, including the Great Recession, changes in the demand for retail, and other personal issues, affected his ability to pay back his loans and he decided to declare chapter 7 bankruptcy in 2018.
In addition, he filed an adversary proceeding against his student loan company. On Jan. 7, 2020, the bankruptcy judge declared that his student loan debt could be discharged.
The judge found that Rosenberg satisfied the elements of the Brunner test because his expenses were greater than his income resulting in negative earnings, he had no money available to repay his student debt over time, and he had made a good faith effort to pay back his student loan debt over the last 20 years.
Rosenberg’s case has given renewed hope to beleaguered student loan debt carriers that it may be possible to discharge their debt after all.