Turns Out Bankruptcy Can Wipe Out Student Loan Debt After All Many Americans who get overwhelmed by student loan debt are told student debt can't be erased through bankruptcy. Now more judges and lawyers say that's a myth and bankruptcy can help.

Myth Busted: Turns Out Bankruptcy Can Wipe Out Student Loan Debt After All

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Many Americans who get overwhelmed by student loan debt are told bankruptcy is not an option for them because you can't get student debt reduced or wiped out through bankruptcy. Well, now more judges and legal scholars are saying that's a myth, and bankruptcy can be a way to help. Some advocates want Congress to act to change the laws so student debt is treated the same as any other kind of debt. Here's more from NPR's Chris Arnold.

CHRIS ARNOLD, BYLINE: A few years ago, Lauren (ph), who lives in Queens, N.Y., had a big problem. She graduated college with an art degree just as the Great Recession hit. She had private student loans with very high interest rates. For work, all she could find were retail jobs. And by 2016, her loans had ballooned to about $200,000. She remembers thinking...

LAUREN: I can't afford to actually pay my bills and eat and pay my rent. Basically, I was financially handicapped. I mean, my student loan payments were higher than my rent was.

ARNOLD: So Lauren started to look into bankruptcy. She doesn't want to use her last name because she thinks all this might hurt her job prospects.

Now, bankruptcy is not fun. Your credit gets destroyed for years, and you have to be in pretty dire financial straits for it to even make sense, but you can get your debts reduced or erased so that you can survive and get back on your feet. But the lawyers that Lauren called said, look; basically, with student loans, it's different.

LAUREN: They had told me things like you have to have a disability where you're not able to even work. And I was like, well, but that doesn't make any sense.

ARNOLD: Many bankruptcy judges and legal scholars agree. Jason Iuliano is a law professor at Villanova University. He says over the past 30 years, Congress has made it harder to discharge student debt. You need to meet what's called an undue hardship standard. That also means more work for your lawyer. But he says that's created this misperception that it's nearly impossible to get help for student loan debt through bankruptcy. Iuliano did some research, and...

JASON IULIANO: What struck me as a really surprising statistic when I first uncovered it - there is a quarter of a million student loan debtors who file bankruptcy each year.

ARNOLD: They do that because they have credit card debt or other debts, and they can get those reduced or erased. But trying to get their student debt forgiven...

IULIANO: More than 99% of the student loan debtors in bankruptcy just give up without even trying.

ARNOLD: But he's also found that when people do try and they pay a lawyer to jump through the extra hoops, about half the time, the person gets some or all of their student loan debt erased.

IULIANO: So I think that's really important for bankruptcy attorneys to see that there are judges out there who are willing to grant undue hardship discharges and that people are much more likely to obtain relief in bankruptcy for their student loan debt.

ARNOLD: Just this month, a judge in New York discharged $220,000 in student loan debt for a borrower. And in her ruling, she criticized the fact that even many lawyers, quote, "believe it impossible to discharge student loans." She added, quote, "this court will not participate in perpetuating these myths."

ROBERT LAWLESS: Well, I think we're reaching a tipping point with what the bankruptcy courts are doing.

ARNOLD: That's Robert Lawless, a law professor at the University of Illinois. He hopes that more people are able to get help through bankruptcy, but he says the rules are still too restrictive. He took part in research on the issue for the professional organization the American Bankruptcy Institute, which recommends...

LAWLESS: That Congress rewrite the rules on student loans and bankruptcy and make it so after seven years from when the loans became due, they would be treated pretty much like any other debt in a bankruptcy case.

ARNOLD: There is at least some support for that in Congress.

Harrison Wadsworth is a consultant for the Consumer Bankers Association. He says most student loans are issued by the government these days, but for loans from private lenders, loosening the rules could push up interest rates.

HARRISON WADSWORTH: Lenders have to be more careful about making loans and probably have to charge more for them.

ARNOLD: In Lauren's case, she eventually found a lawyer and, going through bankruptcy, she got her debt reduced from around $200,000 down to around $100,000, and the bulk of that at a 1% interest rate.

LAUREN: It's still a lot of money (laughter).


LAUREN: Yeah. So for me, like, I was extremely relieved. It is significantly less, and I'm actually able to, like, make the payment. And because they lowered the interest, I'm actually paying off the loan.

ARNOLD: So Lauren says she can recover financially, which, Lawless says, is what bankruptcy is there for.

Chris Arnold, NPR News.

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