Many recent college graduates might be candidates for Chapter 7 bankruptcy due to excessive debt, with an average student loan debt load of $26,000. However, this is usually associated with graduates who cannot find high-paying jobs. Most people would not put lawyers into that category, who have a median starting salary of $60,000. However, law school grads from the most expensive schools may have debt loads of more than $150,000.
It might be mathematically impossible for a law school graduate to fully pay off that amount of debt. Therefore, the federal government has devised a way to give law students a break and allow them to have their debt forgiven after 25 years as long as they have made regular payments.
Unfortunately, there is a caveat with this program. If the law school graduates taking advantage of this program do not make full interest payments, the debt becomes larger. The unsecured debt will also pull down credit scores, causing these graduates to pay more for their other debt. Finally, the government will tax the forgiven amount in one lump sum, so graduates could be faced with $300,000 in extra reportable income during a single tax year.
A bankruptcy attorney can discuss the ways that bankruptcy can help a graduate who is struggling with too much debt. Student loans are not dischargeable under bankruptcy. However, by discharging other unsecured debt, such as credit card debt, students can take control of their budgets so that they can make timely student loan payments. If the graduate is facing bankruptcy after 25 years of payments with the jump in taxable income, a bankruptcy lawyer can also assist with this situation.
Source: Business Insider, “How Student Loan ‘Forgiveness’ Can Lock Law Grads In Debt Bondage,” Erin Fuchs, Nov. 8, 2012