The New York Times reported in “Student Debt and a Push for Fairness” on June 4, 2010 that
when people borrow money to get an education and can’t pay back the loan, a bankruptcy judge will unlikely discharge the debt. This is a problem for many graduates suffering unemployment or underemployment. For instance, these days, there are many unemployed attorneys who cannot find jobs as attorneys so they start applying for jobs as paralegals and law clerks. These jobs pay as little as $25/hour, and require the person to work as a 1099 independent contractor, with the worker having to pay not only the worker’s income taxes, but also the share of taxes normally paid by an employer. Some companies even consider $25/hour to be too much, and try to get the worker to work for less or on commission.
Right now, student loan debt is like child support or criminal fines. A person can file bankruptcy to free up cash, but cannot get rid of student loans in a bankruptcy, unless the person shows undue hardship. Undue hardship usually requires a severe disability that affects the ability for the person to earn a living. If the person argues s/he’s able to work because of mental abilities, though physically disabled, the person unlikely suffers undue hardship. For example, a person cannot argue undergraduate student loan discharge so s/he can apply for a loan to go to graduate school because s/he still has mental abilities.
Right now, a student loan is not likely dischargeable in bankruptcy court even when it’s a private loan from for-profit lenders like Citibank or the student loan specialist Sallie Mae. Under proposed bills in the Senate and House of Representatives, borrowers would need to pay federal loans, like Stafford and Perkins loans. These loans come from the federal government and taxpayers. The proposed legislation might allow private loans to be discharged in bankruptcy. Private loans are not government guaranteed.
There is the argument that if the laws changed on student loans, bankruptcies would rise, but in actuality, people do not like going into bankruptcy because bankruptcy affects their credit for the future when they want to buy a house or car, or start a business. Also, if someone files bankruptcy just to get rid of debt when s/he does not really need to, the person cannot file again for several years when s/he might get into more severe debt like a medical problem.
When thinking of filing bankruptcy, consult with an experienced New York bankruptcy attorney.