Upsolve, a nonprofit that helps individuals file for Chapter 7 bankruptcy free of charge, provided data that shows that student loan debt is a big problem for some of those who go bankrupt. Student loans are almost impossible to discharge in bankruptcy.
“Other forms of debt like credit card debt, or auto loan debt or medical debt can be easily discharged in bankruptcy,” said Michael Brown, Research Analyst with LendEDU. “A borrower must prove that they are experiencing undue hardship in paying back their student loans. Basically, you need to prove that if you continue to repay your student loans, you wouldn’t be able to sustain a good quality of living. You’d almost have to be homeless.”
Thirty-two percent of consumers that file for Chapter 7 bankruptcy also carry student loan debt.
“U.S. Senator Dick Durbin from Illinois, just a week or two ago, submitted a new law proposal to Congress called The Student Borrower Bankruptcy Relief Act of 2019,” said Brown. “It was co-sponsored by three of the major Democratic Presidential hopefuls, Bernie Sanders, Elizabeth Warren and Kamala Harris.
If passed, the new law would put student loan debt on the same footing as other consumer debt. Cumulative student loan debt has surpassed credit card debt to become the second largest category of private consumer debt after mortgages. One of the issues with student loans is they are often approved for young people who have never dealt with credit before.
“Lenders are pretty much lending out money for student loans blind,” said Brown. “A lot of people entering college
have no credit history. They are fresh out of high school.”
Prior to 1976, federal and private student loan debt were both fully dischargeable.