Student Loan Pause Only Delays Bankruptcy for Many

The U.S. Department of Education (DOE) announced on April 6, 2022, that the student loan payment pause is extended through Aug. 31, 2022.

The extension gives borrowers more time to plan for how they will resume payments. According to the DOE, borrowers who take advantage of student loan forbearance will be allowed to reenter repayment in good standing. The announced extension does not apply to private student loans, only federal.

The payment pause is good news for many borrowers. Not being responsible for a monthly student loan payment means that money can be used for necessities like housing and food. The money can also be used to pay other creditors.

For some Pennsylvania student loan borrowers, forbearance only temporarily delays the need to file for bankruptcy.

What Is Student Loan Forbearance?

Federal student loan borrowers have been able to suspend making their monthly payments since March 2020. The payment freeze has been extended six times. Before this latest action, the extension was scheduled to expire on May 1, 2022. Borrowers now have until at least the end of August before they must resume making payments.

More than 43 million borrowers owe $1.61 trillion in collective federal student loan debt. The average federal student loan balance is $37,113. About 30% of undergraduates borrow money from the federal government for their education.

The temporary emergency relief includes the following:

• A suspension of loan payments
• A 0% interest rate
• Stopped collections on defaulted loans

Once the pause is lifted, borrowers will receive a notice at least 21 days before their next payment is due. The notice will include the due date and amount due. There are no COVID-related forgiveness programs for federal student loans.

When student loan payments are reinstated, many borrowers will be left unable to meet their monthly debt obligations. Filing for personal bankruptcy might provide the fresh start many debtors need.

How Prevalent Is Student Loan Debt in Bankruptcies?

Statistics show that student loan debt is a driving force behind many bankruptcies. One-third of individuals who file for Chapter 7 bankruptcy have student loan debt that comprises almost half of their total debt load.

In May of 2020, 9% of borrowers who attended public institutions were behind on their student loan payments. Of those who attended private, nonprofit institutions, 7% were in arrears. Almost 25% of borrowers who attended private, for-profit schools were behind on their loan payments.

About 1.8 million Pennsylvanians owe about $64.5 billion in student loan debt.

What Are My Bankruptcy Options?

Personal bankruptcies generally fall under either Chapter 7 or Chapter 13. Which bankruptcy chapter is best for your circumstances depends on several factors, including your amount of debt, assets, and income.

A Chapter 7 bankruptcy, sometimes called liquidation bankruptcy, may require you to sell all non-exempt assets. For those who are in debt but have considerable assets that you don’t want to lose, Chapter 7 might not be the best option. Anyone whose household is above the state median also will not qualify for Chapter 7.

For those who qualify, a Chapter 7 bankruptcy can discharge (erase) many debts, but not all.

A Chapter 13 bankruptcy is best for those with assets they want to keep or whose income is too high to qualify for Chapter 7. Chapter 13 restructures your eligible debt into a payment plan that typically lasts three or five years. The payment plan provides a manageable way for you to pay a portion of the debt. If you make all your scheduled monthly payments, the remaining debt is usually erased after payment plan ends.

Most student loans are not dischargeable under any chapter of the Bankruptcy Code. Only student loans that impose an “undue hardship” can potentially be discharged in bankruptcy.

Learn if Bankruptcy Is Right for You

Overwhelming debt can feel like a hole in which you are stuck forever. But it doesn’t have to be that way. Bankruptcy can provide the financial and mental peace of mind you need to begin again. At Scaringi Law, we can advise you on your options. If bankruptcy isn’t right for you, we’ll tell you that, too.

Schedule a free initial consultation to learn more. Send us a message online or call (717) 775-7195.