Student loan debt and bankruptcy: The basics in Georgia

College students are saddled with more debt than ever before. Indeed, total student loan debt in the U.S. is now estimated to be more than $1 trillion - making it larger than even credit card debt. On average, 2012 college graduates owed $29,400 in student loans, according to the Project on Student Debt. This is a stark increase from an average of only $18,750 in 2004.

Unfortunately, this means that many graduates are already buried in debt before they ever have a chance to enter the workforce. To make matters worse, the job market isn't exactly booming when it comes to recent college graduates either. In fact, the Labor Department recently reported that the unemployment rate for 2013 graduates stands at 10.9 percent, which is noticeably higher than the overall unemployment rate. Even graduates lucky enough to land a job are discovering that salaries are not what they hoped. Sadly, many students are unable to ever escape the reality of debt.

Interestingly, although bankruptcy is often the top choice for those seeking a fresh financial start, many students avoid this process since student loans are one of the few debts that are not automatically dischargeable. However, before an individual outright dismisses bankruptcy as an alternative to deal with overwhelming student loan debt, he or she should first become familiar with relevant laws. Indeed, he or she may be surprised with just how helpful bankruptcy may be.

Discharging student loans in Georgia

Under the current bankruptcy code, student loans are not dischargeable during bankruptcy unless the failure to do so would result in an "undue hardship." However, the bankruptcy code neglects to define what actually constitutes an undue hardship, which means it has been left up to the courts.

The first time this issue was addressed by the Eleventh Circuit Court of Appeals was in a 2002 case titled In re Cox. In this case, the court was tasked with reviewing a decision out of Georgia in which an individual was seeking to discharge his student loan debts. Given that the court had never previously defined "undue hardship" in this context, it looked to other jurisdictions for guidance. Ultimately, the court elected to apply a three-pronged test that required the individual to show the following factors:

  • Based on current income and expenses, the individual cannot maintain a "minimal" standard of living for himself and his dependents if required to repay the student loans;
  • Circumstances exist that indicate these difficulties are likely to persist for a significant portion of the loan's repayment period; and
  • The individual has made good faith efforts to repay the student loans

Following the Cox decision, bankruptcy courts in Georgia have continued to apply this particular test when determining the dischargeability of student loans through bankruptcy. And, while the burden of meeting this test may be substantial, it is not impossible.

Furthermore, even if the individual in unable to discharge his student loans, bankruptcy may still be helpful. For instance, filing bankruptcy may allow a person to discharge other debts, such as those related to credits cards - thus freeing up significant funds to help pay off student loans. Additionally, bankruptcy may allow the individual to consolidate his or her debt, including student loan debt, which can result in lower monthly payments. However, each situation is different, which is why it is often best to seek the counsel of an experienced bankruptcy attorney if you want to learn what your rights and options may be.