Bankruptcy and Student Loans

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Bankruptcy and Your College Loans

I Can't Pay My Bills

The price of college is steadily rising and student loan debt is increasing along with credit card debt and many recent college graduates are feeling the pinch. Six months after graduation the student loan bills start arriving and even with their lower interest rates, they add to the burden.

Many students think about filing for bankruptcy as a way to relieve themselves of all the debt. While that is certainly a possibility, take a hard look at it before taking the leap. There are several types of debt that may not be discharged by a bankruptcy filing. Among them are

  • Student loans (unless you can prove hardship - more about this later)
  • Overdue income taxes (within the last three years)
  • Child support and alimony payments
  • Recent large credit purchases or cash advances
There are several types of bankruptcy filings:
  • Chapter 7 - Liquidation of assets. All your non-exempt assets will be sold and the proceeds distributed to your creditors.
  • Chapter 11 - Reorganization. Assets do not need to be liquidated. A repayment plan is worked out to allow repayment of some percentage of debt. Some percentage of the debt may be discharged. There is no upper limit to the amount of debt owed.
  • Chapter 13 This filing is only for individuals with a steady income and debts under certain limits. A trustee will be appointed who with the debtor will develop a repayment plan which is presented to the court for approval. Repayments usually are set up for three to five years and as with Chapter 11, some percentage of the debt may be discharged.
Some other items to consider before filing:
  • Depending on the type, much of your debt may NOT be discharged.
  • Bankruptcy filing will remain on your credit record for several years and may affect your ability to receive credit approval in the future.
  • If you file Chapter 7, you will not be able to file again for seven years.
  • If some of your debt had a co-signer, they may still be liable for the entire debt.

Student Loans

Several pieces of legislation in the last few years have made it difficult to discharge student loans through bankruptcy. Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), all qualified education loans, whether or not they are federally made, insured or guaranteed, fall into the non-dischargeable realm. Debtors must prove undue hardship, which usually means meeting the following:
  • The debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for themselves and their dependents if forced to repay the loans.
  • Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.
  • The debtor has made good faith efforts to repay the loans.
These requirements are taken from the court case, BRUNNER v. NEW YORK STATE HIGHER EDUCATION SERVICES CORP and are used by many courts as the test for undue hardship.

Some other avenues that might help rather than bankruptcy. Check out student loan consolidation which may allow you to string out your payments over a longer period of time as well as lower your payments. Also, check with your lender, you may be able to defer payments for a time. Some student loans allow forgiveness if the recipient works in a certain field or location after graduation. Check with your lender.

This should not be considered legal advice. Before considering bankruptcy, you should seek the advice of legal counsel as well as a financial professional.

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