Bankruptcy 'opportunity' following crisis in student loans.

Bankruptcy 'opportunity' following crisis in student loans.

Bankruptcy 'opportunity' following crisis in student loans.© Getty Images

Overwhelmed by debt, an increasing number of Americans are availing themselves of a Biden-era modification that has facilitated the cancellation of student loans - if they are prepared to file for bankruptcy.

The mother of three who is divorced, Elizabeth Hadzic, has thoughts about what she would do if she didn't have to worry about overwhelming student loan debt. She would start her own therapy practice, go back to her native Canada, work from home, and spend a month with her granddaughter.

It might all be made possible by a modification to the bankruptcy procedure in the US.

The US said last year that it will make it simpler for people to declare bankruptcy and get rid of their school loans—a move long seen as impossible.

In a nation where over 43 million individuals have student debt, amounting to a total debt load of over $1.7 trillion (£1.34 trillion), and borrowers frequently face substantial monthly fees decades after they have completed their study, this decision could have far-reaching effects.

According to Ms. Hadzic, filing for bankruptcy "opens up opportunity that I couldn't really see before."

She requested this summer that the government forgive the almost $100,000 in student loan debt she incurred while pursuing her therapist training. She stated that she cannot afford the possible monthly fees of over $1,400 in addition to her other obligations.

"I thought I'd be able to pay it off... but what I do for work just doesn't make that volume of money," the fifty-year-old stated. Prior to moving to a private company in 2019 in an attempt to increase her income, she worked for community health, prison, and homeless programs.

"I kept telling myself I was going to pay this money back, but I understood it was never going to happen. For the rest of my life, this would be my debt."

In the United States, student loan forgiveness has been more difficult to get than for other debts such as credit card debt for many years. Debtors must demonstrate "undue hardship" before their loans may be forgiven, a requirement that has resulted in legal disputes.

In addition to limiting the potentially enormous cost to the federal government, which is the biggest source of student loans in the US, the regulations were designed to stop borrowers from taking on hefty loans that they have no intention of repaying.

However, detractors claim it has created an unnecessarily severe system, giving rise to terrifying tales of the government pursuing cancer patients and bankrupt single mothers for thousands of dollars in unpaid monthly fees.

In contrast to the UK and other regions, monthly student loan payments sometimes have no bearing on the borrower's income and are not subject to an expiration date.

During his 2020 presidential campaign, President Joe Biden supported improvements to the bankruptcy system. This year, the courts denied his most ambitious debt forgiveness scheme.

According to Department of Justice guidelines released last year, if a borrower has made an attempt to make payments, has larger expenses than income, and is unlikely to be able to repay the debt in the future, officials should agree to discharge the loans rather than file for litigation.

According to estimates by University of Utah law professor Jason Iuliano, roughly 100,000 people may be eligible for some student debt relief under the new standards. Each year, an estimated 250,000 people with student loans file for bankruptcy in the US.

However, just 630 or so people have actually filed for personal bankruptcy and had their student loans discharged.

Although it will not disclose the number of cases that were settled, the Department of Justice said that in 99% of them, some sort of relief had been given. Advocates claimed that as of July, that number was only a few hundred.

John Rao, senior counsel at the National Consumer Law Center, stated that the program needed more time to establish its worth because many attorneys were still getting acquainted with the changes.

He added that the impact shouldn't be understated even if the numbers are still minor in relation to the issue.

"There are real stories and people behind those numbers," he stated. "While it may only be a couple thousand who might use this, for them, it's changed their lives."

Kestrel O'Conally, of Washington, filed for relief this spring, seeking to have the more than $600,000 in student debt—which she accrued while pursuing a doctorate in psychology—as well as the approximately $175,000 in interest paid off.

John Rao, senior counsel at the National Consumer Law Center, stated that the program needed more time to establish its worth because many attorneys were still getting acquainted with the changes.

The 41-year-old, who has minimal additional debt, claimed that she had never given bankruptcy any thought until a friend informed her of a news piece outlining the modifications.

The implications of bankruptcy, such as having credit cards cancelled, seemed like tiny prices to pay in her status as a renter with limited assets, she said.

She declared, "It was a no brainer." "I get my life back."

Those who have filed for bankruptcy in an attempt to get relief usually have to wait months. The National Student Legal Defense Network's president, Aaron Ament, cautioned that if the notion gained support, the delays would get worse.

Compared to the usual pre-pandemic year, there have already been almost 30% more petitions in the first ten months following the adjustment.

These figures are anticipated to rise when borrowers must start making student loan payments again after a three-year break brought on by the pandemic expired in October.

Latife Neu, a student loan and bankruptcy attorney in Washington state, said she had noticed a consistent increase in inquiries. "It's getting real now in terms of coming up with the money to pay the loans out of their existing budget," Neu continued.

According to Ms. Hadzic, thousands of dollars in credit card debt accrued when her youngest son ended up in the hospital and she had to take time off work was what ultimately led to her filing for bankruptcy rather than her education loans.

However, her attorney, Timothy Chambers, expressed concern that she may have a similar financial catastrophe if the college loans weren't resolved as well.

"I'm hoping this will be able to give people like Elizabeth that absolute fresh start which bankruptcy is supposed to give," he stated.