Bastarrika, Soto, Gonzalez & Somohano, L.L.P.

What to do with student loans when facing bankruptcy

One of the most difficult types of debt to manage is student loans. This is because student loans are typically not dischargeable in bankruptcy. However, New Jersey debt holders may see this change in the future.

Over 44 million borrowers in the U.S. have outstanding student loans adding up to a collective $1.5 trillion in debt. In 2016, the average student owed $37,172 upon graduation. Unsurprisingly, this is the second highest consumer debt category and often a concern of those considering bankruptcy.

There are exceptions to the no-bankruptcy rule surrounding student loans. Certain criteria for financial hardship, known as the Brunner test, do exist for those in particularly perilous situations. This test requires a debt holder to prove they have made a a good faith effort to repay the loan and have extenuating circumstances creating hardship. If a person meets this criteria, he or she can file an Adversary Proceeding, claiming the student loan would create undue hardship. If successful, the student loan can be discharged.

Some judges surveyed by the Wall Street Journal expressed an interest in opening the law to help more bankruptcy filers holding student loans. Their recommendations included cancelling private student loan debt from unaccredited schools and allowing student loans to be paid through the Chapter 13 debt repayment period. Until this happens, student loan holders may need to look into other debt management options to cover student debt, such as taking out a personal loan or looking into income-driven repayment. A bankruptcy attorney is a good resource to help New Jersey debt holders understand their options for bankruptcy and other debt management possibilities under the law.

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