Every week, as I deal with tens of people, helping them handle debt problems and guiding them through the process of using the bankruptcy safety net for relief, I’m struck by the irony of the situation. One of the largest and fastest-growing forms of debt is student loans, and in many cases, student loans are one form of debt that is not dischargeable in bankruptcy! In addition to the typical factors that get people to the point of discussing bankruptcy with me – job loss, medical bills, and divorce, I’m seeing clients at quite a young age who, on top of their other problems, are struggling with substantial student loan debt. In Are Gen X And Gen Y Sowing The Seeds Of Bankruptcy? I explained that the bankruptcy system was never meant to solve everyone’s problems. Some of the problems that plague my college-educated clients may have begun in college (see Can Bankruptcy Begin In College?),but have more to do with misuse of credit and debit cards than with student loans.

But, as the Indianapolis Star reported just a week or two ago in “Student Debt Levels Portend Rising Loan Default Rates”, the U.S. has never before experienced the combination of an economic downturn along with such high levels of student debt. Total borrowing for school for the ’07-’08 school year is $85 billion, double the number of a decade earlier, and the Star cited a statistic provided by Sallie Mae, the nation’s largest student lender, of a 9 ½% default rate on student loans in September, up 10% from one year ago.

As I mentioned, it’s ironic that the Bankruptcy Code rule is that student loans are non-dischargeable in bankruptcy, unless substantial hardship can be established. This in itself is complex, involving documented proof that efforts have been made to repay the student loans for at least five years leading up to filing bankruptcy, proof of severe physical disability, or proof of dependents’ needs that could not be satisfied if the money went towards repaying the student loans. Even private students loans are non-dischargeable under the 2005 changes to bankruptcy law. The bottom line is that the debtor has to prove he or she could not maintain even a minimally adequate standard of living and still repay the loan.

In most cases, the only way filing bankruptcy helps with respect to student loans is by eliminating other debts, freeing up money to repay the student loans. In the case of Chapter 13 bankruptcy, bankruiptcy buys time to spread out payments to other creditors. What’s crucial to remember is not to allow problems to progress before seeking professional help. College grads should be smart enough to know that, but, of course, that’s not always the way things play out.