A friend of mine once told me about his scheme to take over the world, which he apparently hasn’t succeeded at yet.
Here’s the gist:
“Once I get good credit, I’ll apply for every credit card in the world and take cash advances from all of them. I’ll use the millions of dollars I get from this to create a global lottery. Everyone who swears undying loyalty to me will get one lottery ticket.”
You know, this plan seems like it might have a few holes…
Speaking of holes in plans, I’d like to talk about another “hack” I’ve been hearing about recently that involves taking cash advances from credit cards.
This particular plan’s goal is to attain student debt forgiveness in a roundabout way – since, I hope you’re aware, student loan debt is nigh-impossible to have forgiven (more on this later).
Here are the steps involved:
- Take a bunch of cash advances from credit cards
- Pay off your student loans with the money gained this way
- File for Chapter 7 bankruptcy to have the credit card debt forgiven
- Deal with terrible credit for ten years, but smugly smile as your debt is wiped away
So the question is: does this actually work?
In short: No. Absolutely not.
If that’s all the answer you need, you can go ahead and stop reading now; however, if you’d like to know why this plan won’t work, read on.
The Nature of Student Loan Debt
There’s a big reason news outlets, blogs, and everybody else keeps railing on about the “student debt crisis”. According to FinAid.org’s student debt clock, the U.S. is currently saddled with $1.18 trillion in student loan debt.
If that amount were equally distributed among everyone in the U.S., then each of us would owe around $3,700. That’s right – babies would owe the government $3,700.
The sheer amount of debt out there is a problem to be sure. However, there’s a particular quality of student loan debt that makes it so bad: in general, it can’t be forgiven.
Now, there are certain programs out there that offer student loan forgiveness in very specific conditions, and if you’re curious about those, I’d recommend listening to this interview with Heather Jarvis, who is a student loan expert. She goes over several of them.
However, for the most part, you can’t have your student debt forgiven – especially if it comes from private lenders (another good reason to never take a private student loan).
This means that, were you to file for bankruptcy, you wouldn’t be able to wipe out your student debt even if you were successful.
Why? Well, first let me (briefly) explain what bankruptcy actually is.
What is Bankruptcy?
Simply put, bankruptcy is a process that lets people either get rid of some/all of their debts, or set up a repayment schedule that works better for them and is protected by the bankruptcy court.
There are actually two main forms of bankruptcy in the U.S., which are:
- Chapter 7: This option can wipe away certain debts entirely. You won’t be able to use this option if you have a certain amount of disposable income.
- Chapter 13: This option lets you propose a repayment plan that details how you’ll pay back your creditors over a certain amount of time. You have to have a steady income to claim this option.
This is a very quick overview, so check out NOLO’s page on bankruptcy if you want to know more.
While both forms of bankruptcy can help reduce your debt load and restrict what creditors can do to you, they both have important consequences as well. That’s why bankruptcy is considered a last-resort option for debtors.
If you go the Chapter 7 route, your personal property may be liquidated (read: taken from you) in order to pay down some of the debt. You’re usually allowed to keep property that’s considered “exempt” under government law, but in certain cases you could lose stuff you own.
Also, bankruptcy stays on your credit report for quite a while – Chapter 7 stays there for 10 years, while Chapter 13 stays for 7.
During that time, it can be difficult to obtain other loans and forms of credit. It can even prevent you from getting jobs.
So bankruptcy is not something to take lightly, and you definitely shouldn’t be brushing off massive amounts of student debt, thinking you can just bankrupt it later.
Especially since it most likely wouldn’t work anyway.
Why the “Clever Hack” Doesn’t Work
Bankruptcy can wipe away some types of debt, but not all of them. For example, the following types of debt are nondischargeable:
- Alimony (spousal support)
- Child support
- Debts from personal injury sustained while driving drunk (if you have this type of debt, please give me your address so I can poop on your face)
- Loans that were obtained through fraud (poop-rule applies here too)
Hopefully you don’t have any of these types of debt right now. Unfortunately student loans are generally nondischargeable as well. The only way you can get around this rule is if you can prove the debt is causing you undue hardship – and the guidelines for proving that are pretty damn strict.
“But wait – I can just pay off my student loans with credit cards, and then file Chapter 7 to wipe away the credit card debt which is dischargeable!” – smart-ass grad
So now we come to the “hack”.
I have heard a few different people wondering aloud why more students don’t do this. When I heard about it the first time, my rationalist training kicked in and a simple thought bubbled to the forefront of my mind:
“I notice that I am confused.”
This has turned out to be a pretty useful habit to be in – which is probably why it’s the first item on the Rationality Checklist. In this case, I followed up that thought with the realization that bankruptcy officials are probably not that stupid.
“If I were writing bankruptcy law, I’d assume that I’m a person who is generally knowledgeable about credit and what you can do with it. And if I were making a list of the types of debt that are nondischargeable, I’d probably assume that people would try to sidestep that list by paying off their nondischargeable debts with dischargeable debt. I think I’ll write a clause that prevents this.”
And so I went digging through Cornell’s online law library until I found the section I was looking for. Here are the laws for determining is debt is dischargeable (and I’ve only included the bit about student loans here):
(a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;
So that’s the clause that establishes student loans as nondischargeable.
There’s also something in bankruptcy law called adversary proceedings. These are separate lawsuits where one party in a bankruptcy case brings a complaint against the other party.
Usually, adversary proceedings are initiated when the creditor want to render your debts with them nondischargeable.
Given this, the credit card company can sue to have the debt ruled as nondischargeable since you incurred it to pay off nondischargeable debt.
They can also sue you for fraud. So, in short, don’t do it.
You can learn more about the laws behind this in this article.
How to Actually Deal with Student Loan Debt
I realize that at least part of your reason for being here is that you’d like to learn about some “hacks” that will help you pay off your student loans more easily. For someone looking at an absolute shit-load of debt, this article might be a depressing read.
However, since one of my main goals with this site is to help you either stay out of debt or pay it off more quickly, I want to leave you with a few tips that actually do work.
- Know the true cost of your loans – if you’re still in school, look ahead and do the actual math on how much you’ll owe each month when you graduate and for how long. It may affect your future plans (for instance, grad school plans)
- Reduce your time in school – if you plan it right and test out of things you already know, you probably don’t need to be in school all four years. If you’re taking on a lot of debt, it might be worth graduating early.
- Live like a college student after graduation – don’t upgrade your life once you get out of school. I know it’s tempting, but keep your focus on learning, building your network, and getting good at your craft – rather than upgrading your material possessions.
- Learn about personal finance – knowledge is power. I spend every morning walking and listening to the Listen Money Matters podcast so I can learn to better manage my money. Lots of what they talk about is on debt reduction, so I highly recommend listening in.
Here’s some debt-payoff inspiration as well:
- How Stephanie Halligan paid off over $34,000 in under 4 years
- How Brian McBride paid off over $26,000 in less than 2 years
- My own story – paying off $14,431 in under 6 months
As I learn more, I’ll continue to write new articles on paying off your debt. I’ll also be interviewing several experts on the subject in the near future for the CIG podcast.