Is bankruptcy the answer?

When You Can't Pay Enough to Shrink Your Student Loans and Other Debt

by Gary Foreman

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Dear Dollar Stretcher,
My husband and I have been with a credit counseling service for two years. We started off with $22,000 in debt and are now down to $15,000. We're making monthly payments that were less than without the service. Now our student loans are coming due (two masters degrees and two kids later), which are about $100,000. We are considering bankruptcy to stop paying on the old debt and get prepared for the student loan payments. We have been trying for two years and feel as if we have gone nowhere and want to declare bankruptcy to get back on our feet.
Kay in Southern California

Talk about some big numbers! It's easy to see why Kay and her husband feel overwhelmed by the debts facing them.

Many recent graduates have large student loans when they graduate, and that's understandable. A good education can be a worthwhile goal, and education can pay off handsomely for some. According to, the median earnings of a person with a master's degree can range from $52,300 to $121,000, which is typically $17,000 more than someone with only a bachelor's and $33,725 more than someone with only a high school diploma.

But these earnings figures include people who have been in the workforce for years. And Kay implies that earnings alone won't solve their problem. Let's take a look and see if we can't help them decide whether bankruptcy is the best course of action.

We'll begin by looking at some facts that will affect the decision. First, student loans are not eliminated in bankruptcy unless the court determines that they would represent a serious hardship. So even after a successful bankruptcy, Kay and her husband will still need to repay them. That means that the most debt that they can eliminate would be the $15,000 they're currently handling through the credit counselor.

Am I a good candidate for credit counseling?

Next, Kay needs to realize that a judge can throw out her Chapter 7 bankruptcy petition. If the judge feels that Kay could repay a reasonable portion of the loan in three to five years, or finds that her income is greater than her expenses, the application will be denied.

Even if Kay is granted bankruptcy, there will still be consequences. She can expect to give up a second car, bank and investment accounts and family heirlooms. The bankruptcy filing will remain on her credit report for ten years. That will make it difficult to obtain new credit.

It doesn't look like filing for bankruptcy will really help. The majority of the debt would remain and so would some nasty consequences.

Am I a good candidate for bankruptcy?

So what can Kay do about the mountain of student debt? The first thing is to realize that they're not alone. According to, roughly 11.3% of student loans are in default; many grads struggle with repayment.

The second thing is to realize that failure to repay student loans on schedule can have consequences. Credit bureaus can be notified of your delinquency. IRS refunds can be claimed to help repay the loans. The creditor can even collect 15% of your disposable pay for debt repayment.

Kay might want to consider 'consolidating' her student loan. It's similar to refinancing your house. One program could be tailor-made for her situation: the William D. Ford Federal Direct Loan Program. The program considers need in setting up a repayment plan for the borrower.

A number of repayment options are available. A standard plan carries a fixed rate with a 10-year repayment period. An extended plan allows you to schedule the repayment period to up to 30 years. There's also a graduated plan, in which payments increase as your earning ability increases. Finally, there's also a plan (not available to everyone) that will adjust your payments to your income.

Kay can find out more about consolidation programs offered through the government on the U.S. Department of Education's Federal Student Aid website.

We can all learn from Kay's predicament. It's always tempting to borrow money. We feel like we need the money for something important like a college education. And borrowing is easy to do. Fill out an application, sign on the dotted line and they give you a check. Or whip out the plastic and sign the slip. Nice and easy.

But any time you borrow money there's a cost to you. That cost won't come until later. But when it does come, it might overshadow the benefit you received earlier.

In Kay's situation, she and her husband gave up certain options when they accumulated that much student debt. They might not have known it at the time, but they were effectively saying that when they graduated they wouldn't drive new cars. They would live in a lesser home and probably rent for a longer period of time than most graduates. Fancy vacations wouldn't be part of their lifestyle. Starting a family would need to be delayed if they were to avoid severe financial hardship.

Is that a stiff price to pay? For some it's too high. They'd rather reduce their class schedule, work more and get their degree a little later without having a debt to repay.

Find out if you can benefit from student loan debt help.

For others, the higher income that goes with a degree makes the post-graduate sacrifice worthwhile. But, regardless of the answer, everyone should know the costs before making a decision that will affect their lives for many years.

Kay and her husband can expect a struggle. If they declare bankruptcy it will be reflected on their records for 10 years. In either case it will probably take that long for them to repay the student loans. Hopefully, the additional earning power that they have will make the repayment a little easier.

Updated January 2017

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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