While it’s a situation that no one envies, sometimes filing for bankruptcy is the only possible move that consumers have left.
When debt from things like credit cards or medical bills simply become too much to pay back, Chapter 7 bankruptcy is a viable option. This process will liquidate a consumer’s assets and use the funds to pay off as much outstanding debt as possible.
Though consumers may lose valuable possessions, using bankruptcy can offer a fresh start on their financial lives.
Interestingly enough, student loan debt is one form of debt that is almost always impossible to discharge in bankruptcy, despite being the second highest form of outstanding debt in the United States.
With this in mind, LendEDU wanted to analyze how significant student loan debt is for consumers that have looked to discharge their debt in bankruptcy.
Using exclusive anonymized data provided by Upsolve, a nonprofit that helps low-income individuals file for Chapter 7 bankruptcy free of charge, we were able to uncover just how many bankruptcy filers also carry student loan debt and how much of their total debt is comprised of student loan debt.
And, the timing of this report could not be more perfect as Senator Dick Durbin recently introduced a new bill to Congress, co-sponsored by presidential hopefuls Bernie Sanders, Elizabeth Warren, and Kamala Harris, that would make it easier for borrowers to discharge their student loans in bankruptcy.
Data & Analysis
32% of Consumers Filing For Chapter 7 Bankruptcy Also Carry Student Loan Debt
The data analyzed included 1,083 different cases, each representing a different consumer using Upsolve to discharge their bankruptcy.
32% of all Upsolve users that sought to discharge their outstanding debt in bankruptcy also carried student loan debt; debt that is highly likely to remain with them even if they are able to discharge their other debt in bankruptcy.
For reference, Chapter 7 bankruptcy claims that go through Upsolve carry a 98% success rate when it comes to having the debt successfully discharged. That success rate does not include student loan debt cases as Upsolve does not help with bankruptcy claims for student loan debt.
For nearly one-third of those users, however, their debt nightmare will not end with Upsolve’s services as their student loan debt will remain and still have to be repaid. In fact, Upsolve actually informs users to not use Upsolve if they are looking to discharge their student debt because that process requires specialized attention that the nonprofit does not provide.
Once we uncovered that a fairly significant cohort of bankruptcy filers also hold student loan debt that will keep them in a difficult financial situation even after the other debts are discharged, we wanted to know what proportion of this group’s total debt was comprised of student loans.
For Bankruptcy Filers With Student Loan Debt, Student Debt Makes Up 49% of Their Total Debt On Average
Not only do many consumers have to deal with the stresses that come with paying off student loan debt even after successful bankruptcy proceedings, but the amount of debt they still owe is still quite significant due to student loans.
It is quite startling to see that student loan debt, by a wide margin, makes up the largest proportion of the average bankruptcy filer’s total debt if that filer also has student loan debt. On average, student loan debt represented 49% of this cohort’s total debt with the next closest being “uncategorized debt” at 24%. “Uncategorized debt” could have included any form of debt, including that from credit cards, mortgages, or medical expenses amongst others.
As noted in the introduction, the point of filing for Chapter 7 bankruptcy is to have all of one’s outstanding debt discharged so that the person can restart their financial life, debt free.
However, one-third of these bankruptcy filers can have almost all of their debt discharged but have nearly 50% of the total debt remaining to be repaid. That does not sound like a financial restart, rather a continuance of the debt-ridden life that creates and exacerbates so many problems.
It’d be one thing if student loan debt made up a very small percentage of a bankruptcy filer’s total outstanding debt, but this is not the case for a solid contingent of consumers.
21% of Total Upsolve User Debt Comes from Student Loans
To get a good understanding of just how prevalent student loan debt is amongst Americans who are looking into bankruptcy to ease the tensions on their financial lives, we wanted to show all of the data and not just the numbers filtered to only include consumers that had student loan debt.
As it turns out, student loan debt still made up 21% of all debt that was processed by Upsolve. It is worth noting that the “uncategorized debt” section could include any class of debt, including that from credit cards, medical expenses, and automobiles amongst others.
Even when the Upsolve data is not concentrated on consumers that also have student loan debt, student loan debt still accounts for a large percentage of all debt.
However, while other debts like credit card and mortgage debt can be discharged in bankruptcy, student loan debt will almost always need to get repaid at all costs to the consumer.
That seems contradictory to the entire point of a person resorting to bankruptcy to remedy their financial issues. A better process would go a long way in helping so many Americans that are struggling to stay above water in large part due to their student loan debt.
Student Loan Debt & Bankruptcy in the United States
Currently in the U.S., student loan debt, whether it be from private or federal loans, cannot be discharged in bankruptcy unless the borrower can prove “undue hardship.”
Proving undue hardship for student loans is notoriously difficult, and the standard in which to prove undue hardship is known as the “Brunner test.” This requires student loan borrowers to prove that they cannot meet a minimal standard of living if they continue to repay their student loans.
Further, they must prove these circumstances will persist, otherwise known as a “certainty of hopelessness,” and that they have made a good-faith effort to repay their loans.
Coincidentally, there have been recent developments in Washington D.C. that may change these guidelines. The Student Borrower’s Bankruptcy Relief Act of 2019, introduced to Congress last month by Senator Dick Durbin and co-sponsored by presidential hopefuls Bernie Sanders, Elizabeth Warren, and Kamala Harris, would eliminate the part of the bankruptcy code that makes private and federal student loans non-dischargeable unless undue hardship is proven.
If passed, this act would treat student loans the same as nearly all other forms of consumer debt when dealing with bankruptcy proceedings.
If the data from this report is any indication, this proposed law would be of great assistance to many student loan borrowers throughout the country that are considering bankruptcy as a viable option for their personal finance situation.
Tips for Avoiding Student Loan Default
While you probably can’t discharge student loan debt in bankruptcy, you can default on your student loans if you continually miss payments. The financial repercussions of student loan default can be severe, so here are some tips to help avoid it.
Speak to Your Lender
Whether you have federal student loans or private student loans, communicating with your lender to explain your situation and understand your options could go a long way toward avoiding student loan default.
For example, you might be able to enter into student loan deferment or forbearance, although the latter is usually only applicable to private student loan borrowers.
Consider Changing Your Repayment Plan
If you have federal student loan debt, you could look into entering an income-driven repayment plan, which might make your monthly payments more affordable and help you avoid default. Income-driven repayment plans only require you to make payments relative to your income.
There aren’t plans like the above if you have private student loan debt, but if you speak to your lender you might be able to work out a more flexible repayment plan.
Refinance Your Student Loans
If you refinance your student loans with a private student loan lender, you might qualify for a lower student loan interest rate, which could help you save money and afford monthly payments.
Refinancing your student loans might also allow you to pay off your student loans faster, and you can actually refinance your student loans more than once if you feel that you can secure an even better interest rate down the line.
Methodology
All of the data in this report derives from exclusive anonymized data provided by Upsolve to LendEDU. Upsolve is a nonprofit that helps low-income consumers file for Chapter 7 bankruptcy at no cost.
Upsolve’s data was provided to LendEDU in an anonymized format that allowed us to see the type of debt associated with a bankruptcy case (student loan, medical, etc.) and how much of each type of debt was owed by an individual consumer. In total, there were 1,083 individual bankruptcy cases included in the Upsolve data.
See more of LendEDU’s Research