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A few years ago, Lauren had a big problem. The Queens, NY resident had graduated from college with an arts degree when the Great Recession hit. She had high-interest private student loans. The only job she could find was retail jobs. And by 2016, their loans had grown to about $ 200,000.
“‘I can’t afford to pay my bills, eat, or pay my rent,'” she recalls. “I was financially disabled. I mean, my student loan payments were higher than my rent.”
So Lauren started looking into bankruptcy. She doesn’t want her last name to be used because she thinks all of this could affect her job prospects.
Over the years the myth has become established that student debts cannot be reduced or bankruptcy erased. But many bankruptcy judges and legal scholars believe that is wrong. And bankruptcy can be a way to get help.
Bankruptcy is no fun. Your credit will be wiped out for years and you have to be in quite a financial hardship for it to make sense. But when you get to that point, you can reduce or go bankrupt your debt so you can get back on your feet.
But the lawyers Lauren called said that student loans were different because there were special rules for student debt.
“They told me things like having a disability where you can’t even work,” she says. “And I was like, ‘Well, but that doesn’t make sense.’ “
Jason Iuliano, a law professor at Villanova University, says Congress has made it harder to pay student debts over the past 30 years. They must meet the so-called “inadmissible hardness” standard. That also means more work for your lawyer.
But Iuliano says this has led to the misconception that it is almost impossible to get help with student debt through bankruptcy. That is not true.
Iuliano has done some research and says that a quarter of a million student loan borrowers go bankrupt every year. They do this because they have credit card or other debts and these can be reduced or erased.
But when it comes to paying off their student debt, “over 99% of student loan debtors give up bankruptcy without trying,” says Iuliano. “It struck me as a really surprising statistic when I first discovered it.”
For those who try anyway, Iuliano’s research shows that about half the time, the person will pay off part or all of the student loan debt. A study he conducted found that they got help through bankruptcy around 40% of the time. And he says recent data from last year shows that number increases more than 50% of the time.
“I think it is very important for bankruptcy attorneys to see that there are judges willing to give relief in unjustified severity and that people are much more likely to get bankruptcy relief for their student loan debts,” says Iuliano.
As recently as this month, a federal judge in New York acquitted more than $ 220,000 in student loans for a borrower. The chief bankruptcy judge Cecelia Morris criticized in her judgment that even many lawyers “consider the replacement of student loans to be impossible”. She added, “This court will not participate in upholding these myths.”
Robert Lawless, a law professor at the University of Illinois, says, “I think we’re reaching a tipping point with what the bankruptcy courts are doing.” He hopes the bankruptcy will help more people.
But he says the rules are still too restrictive. Lawless researched the subject with a group of attorneys and former judges from the American Bankruptcy Institute, a professional organization. They recommend that Congress rewrite the rules for student loans in the event of bankruptcy. According to Lawless, seven years of maturity, the loans would treat virtually any other debt in a bankruptcy case.
There is at least some support for this in Congress. Part of the barrier now is that current regulations often require you to pay more money to your attorney to try to cancel student debts.
Lawless says it costs about $ 1,200 on average to file a typical Chapter 7 bankruptcy case. Bankruptcy attorneys say it can cost thousands of dollars more to pay your attorney to overcome the extra tires associated with student loan debt unless you can find one to do so at a reduced rate.
Iuliano says the outcome and how much student debt will be forgiven may have a lot to do with which Special Judge you end up with and what the rules are in that bankruptcy district.
This is in part due to the formulation of the original law that student loan borrowers must meet an “undue hardship” threshold, he says. Iuliano says Congress never defined what that means, so it gives the courts and judges a lot of discretion.
Harrison Wadsworth, an advisor to the Consumer Bankers Association, notes that most student loans come from the government. But for loans from private lenders, he says, easing bankruptcy rules to facilitate the reduction or elimination of student debt could drive interest rates higher. “Lenders would have to be careful about lending and likely charge more for it,” says Wadsworth.
Lauren eventually found a lawyer who took her case and billed her approximately $ 3,000, doing some of the work on a pro bono basis. And when she went bankrupt, her debt was reduced from about $ 200,000 to about $ 100,000, with the majority of it reduced to a 1% interest rate.
“It’s still a lot of money,” she says. But she says, “I was extremely relieved.”
Lauren says it’s significantly less than she previously owed. And she says the payments are manageable.
“And because they cut interest rates, I’m actually paying off the loan,” she says. So she says she can recover financially, which Lawless says is what led to the bankruptcy.