Student loans often lead people to explore Bankruptcy options. The average class of 2015 graduate with student-loan debt will have loans of approximately $35,000. Even when this amount is adjusted for inflation, it is still more than twice the amount students took on as debt two decades earlier. This issue extends to secondary education. Approximately 71% of bachelor’s degree recipients will graduate with a student loan, compared with less than half two decades ago and about 64% 10 years ago.
Parents are also taking on a large amount of student loan debt. Approximately 17% of graduates have parents with loans on their behalf.
Collectively, total student loan debt, including both federal and private education loans, will total approximately $68 billion this year for graduates with a bachelor’s degree and their parents. This is more than ten-fold increase since 1994. As a result many individuals are forced into difficult decisions regarding the repayment of this debt.
In a vast majority of circumstances, student loan debt is not dischargeable in bankruptcy. However, if student loan obligations, or a default on those obligations, have created other related financial problems, bankruptcy might still be an option to address other unsecured and secured debt issues.
Bankruptcy can be used to stop garnishment efforts, even if the garnishment is for a non-dischargeable student loan debt. When a bankruptcy proceeding is filed, a stay is issued that prevents garnishment from continuing, even though the garnishment is seeking repayment for non-dischargeable obligations. Because student loan debts are not dischargeable, when the bankruptcy proceeding completes, it is necessary to re-establish and continue repayment with the student loan creditor. However, certain bankruptcy proceedings, such as chapter 13, can last for up to 36-60 months, during which individuals pay a monthly payment to all creditors based on a budget, rather than what each creditor is seeking. This can potentially create a more reasonable means of dealing with multiple debt obligations with a single payment.
In chapter 13, student loan obligations are typically treated with other general unsecured debts while the matter proceeds. Upon successful completion, other general unsecured debt obligations are discharged, while the remaining balance of student loan obligation would remain due. In short, chapter 13 can provide a time period of temporary relief from student loan debt payments. This can provide a necessary reprieve for individuals to discharge other obligations so that when the bankruptcy concludes, their available income can be used to solely address the remaining student loan debt payment.