Can student loans be part of a bankruptcy?

After a lengthy reprieve that started in 2020, those with ongoing student loan debt had to resume making their installments in October of 2023. When considering average monthly payments at nearly $300, the additional money going out could create financial problems. Additionally, increases in interest rates, inflation, and ongoing economic issues could worsen a bad situation.

A significant change

Traditionally, student loan debt did not qualify for discharge due to the complex process involved. Last year, the Department of Justice stepped in to stave off financial disaster by revamping the bankruptcy process. Student loan debt became dischargeable based on evaluations of specific criteria to identify a borrower’s ability to pay.

Subsequently, bankruptcies in the United States significantly grew for those eligible to rid themselves of massive debt. New cases numbered more than 600, a significant jump from pre-COVID averages of 480. With almost all the circumstances resulting in full or partial discharge, more bankruptcies are likely, potentially at record levels.

A complex process

Debt discharge is not automatic. Bankruptcy courts have to review an applicant’s expenses versus their income. Certain factors must be in play, including the possibility of a disability or advanced age. Significant times when someone is unemployed may play a role in that decision.

An easing of the process should not be a factor for those looking to get out from under significant debt from student loans and other financial obligations. The filing and subsequent discharge of student loan obligations will significantly reduce credit scores, anywhere from 200 to 240 points. Applying for another loan or credit card will likely be rejected.

Few problems create more stress than money-related issues. Before taking a drastic step, help from a skilled and experienced bankruptcy attorney may be necessary.