Bankruptcy: Student Loan Debt Crisis

Student Loan debt in the United States, now at $1 Trillion Dollars, is called “the next debt bomb” for the U.S. Economy.  Total U.S. student loan debt now exceeds the volume of credit card and auto loan debt combined according to the Associated Press.

The head of the National Association of Consumer Bankruptcy Attorneys (NACBA) made the “next debt bomb” statement.  But he points out that in 2006 and 2007 his organization warned of impending mortgage problems, one to two years prior to the mortgage industry meltdown which kicked the U.S. Economy into the ditch from which it still has not fully emerged.

Debt Faced by Graduates

Average student loan debt is over $25,000 per graduate.  But, more than 95 U.S. Colleges report graduates with over $35,000.  Those numbers, reported by USA Today, pale compared to an American Bar Association Journal report that 85% of graduates from accredited law schools face average debt of $98,500.

Discharging student debt in bankruptcy is a rare exception to the rule that student loans are not discharged in bankruptcy.  More on this in another blog post on another day.  Generally, a minimal standard of living must be impossible due to the student loan debt, circumstances exist making it likely the financial hardship will continue and good faith efforts have been made to pay.

National Implications of Student Loan Debt

In the words of a February 7, 2012 report by the consumer bankruptcy group NACBA, bankruptcy attorneys nationwide report what they are seeing in their offices “feels too much like what they saw before the foreclosure crisis crashed onto the national scene”.  [The Student Loan “Debt Bomb”: America’s Next Mortgage-Style Economic Crisis?; A Report Prepared for the National Association of Consumer Bankruptcy Attorneys, Feb. 7, 2012.]

Those with huge student loan debt will find only indirect relief in bankruptcy.  A chapter 7 will wipe away credit card and other unsecured debt.  This may leave enough cash flow to make student loan payments more feasible.

I’m a member of NACBA.  I do not speak for the organization.  But, the group is at the cutting edge of providing consumer bankruptcy attorneys such as myself with resources in representing clients faced with issues arising from debt.

For more on student loans and bankruptcy click here.

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