Does Chapter 7 Cover Student Loans in California?
Student Debt Statistics: California vs. National Average We usually hear about student debt in news articles and political debates. But for millions of families, the student debt crisis is not merely an argument unfolding on the television set – it is a real, immediate financial burden that creates constant pressure simply to stay afloat. Student loans create an extraordinarily heavy debt burden for millions of young people and their loved ones, sometimes forcing students to drop out, change schools, or take on second jobs. The problem is not getting better, either. On the contrary, our nation’s student debt burden – as of 2020, collectively, people owe more than $1.6 trillion. This amount is growing heavier every day. According to Experian, the average student loan obligation is $38,920. That means student loan debt is surpassed by only mortgage debt and home equity lines of credit. In fact, student loan debt saw the most significant increase of all types of consumer debt between 2019 and 2020. Students in California may have it especially tough. While the average student loan debt per capita in California is “only” $34,187, which is less than the national average of $38,920, the Institute for College Access and Success still ranks California among the nation’s top 20 states with the highest student loan debt. It is obvious that student debt poses a major financial problem for tens of millions of people, including many who attended college here in California. The question is, what can graduates and their families actually do about it? It’s one thing to call your representative – but what if you need financial relief now? Depending on your situation, Chapter 7 bankruptcy could provide the debt relief you need. Keep reading to find out how.
Eliminating Student Loans in Chapter 7 Bankruptcy Bankruptcy is a legal process that allows single people, married couples, and business owners to reduce, pay off, or eliminate their debts according to their financial ability. Most people who file bankruptcy in California use a type of bankruptcy known as “Chapter 7,” which is also called “straight” or “ordinary” bankruptcy. According to the United States Bankruptcy Court for the Eastern District of California, Chapter 7 cases accounted for more than 6,300 of the 8,500 bankruptcy filings in the court’s Sacramento courthouse last year. In other words, about 75% of the people who filed bankruptcy in Sacramento during 2016 chose Chapter 7 bankruptcy. Chapter 7 allows filers to wipe away many of their debts. Debts that can be erased in Chapter 7 bankruptcy are called “dischargeable debts.” Medical bills and credit card bills are key examples of dischargeable debts in Chapter 7. Student loans are usually non-dischargeable in Chapter 7 bankruptcy, which means that in most cases, they cannot be erased by bankruptcy. However, exceptions exist that may apply to your situation.
The Brunner Test If you can show that the debt is causing you undue (excessive) financial hardship by meeting certain standards under the “Brunner test,” the court may agree to discharge the debt and eliminate your student loan liability. To pass the Brunner test and discharge student loans in Chapter 7 bankruptcy, you must prove that:
Repaying your loans is preventing you from attaining a minimum standard of living for yourself and (where applicable) your dependents.
Your current financial circumstances are unlikely to change.
You have made sincere (“good faith”) efforts to pay back what you owe.