Student Loan Debt & Bankruptcy
By Lauren Lamb
Students are graduating from college with more student loan debt than ever, even adjusted for inflation1. The increased cost of education, increased educational requirements for certain career fields and a weak job market have combined to cause many graduates to have trouble repaying their student loans. Most don’t consider the possibility they will be unemployed or underemployed during the repayment term when taking out their student loans. Some people go back to school in order that their loan payments will be in deferment when times are bad. Others contact their lenders and are put on forbearance plans to put off payments for a certain period of time or until their financial situation improves. New income-based repayment plans offered by some lenders help graduates get put on a payment plan that fits their budget.
Unfortunately, there are some people that can’t go back to school due to work or family, don’t qualify for or have exhausted their number of allowable forbearances, and either don’t have a lender that offers or don’t qualify for an income-based repayment plan. These people face harassing phone calls and letters. Some may even have their federal tax refund seized and their wages garnished. This can cause an already precarious financial situation to become disastrous. It may seem like there aren’t any options. Most people aren’t aware that bankruptcy can help alleviate the burden of student debt in some situations. The bankruptcy options for those unable to pay their student loan debt aren’t as plentiful as those for people with credit cards or medical bills, but bankruptcy can still be a helpful tool in dealing with student loan debt for some.
Chapter 7 Bankruptcy and the Discharge of Student Loan Debt
A small number of people qualify to have their student loan debt, both federal and private, completely wiped out with a Chapter 7 bankruptcy discharge. Special permission must be asked of the Bankruptcy Court in order to have student loan debt forgiven and a hearing will be held in front of a bankruptcy judge. The requirements for having student loan debt forgiven are very strict to say the least. Probably less than one-tenth of one percent of the clients we see would have a chance of meeting the requirements. All of the following criteria must be met in order to qualify.
- You must be unable to provide a minimum standard of living for yourself and your dependents if you had to pay back even a minimal amount to the student loan.
- Your inability to repay even a minimal amount to the student loan is likely to persist for the majority of the repayment period.
- You have made a good-faith effort to repay the student loan debt.
The Bankruptcy Court will scrutinize your spending in order to determine if you’re unable to provide a minimum standard of living if you’re forced to repay the student loan debt. If you’re paying for a fancy car, unlimited cell phones for your whole family or expensive rent, the Court will see these as places where you could cut expenses in order to repay your student loans.
The length of time you are likely to be unable to repay your student loans is the requirement that is hardest to satisfy. The Court does not accept a bad job market or the fact that you got your degree in a field that makes it hard to find a job as proof that you will be unable to repay your loans for the majority of the repayment period. For instance, if you got your degree in musical theatre, but are working for minimum wage in retail, the Court will not automatically assume that you’ll be unable to get a good paying job for the next five, 10 or 15 years. The same goes for someone with an accounting degree who has to do temporary work as a receptionist since the local accounting firms are on a hiring freeze. Most often, the people who can prove that they will be unable to repay the loan for the majority of a repayment period are disabled and elderly persons who are unlikely to ever work again.
The Court will also examine whether you’ve made a good-faith effort to repay your loans. This can include not only repayment of the loans, but, sometimes, the judges will consider how you’ve dealt with the loans when you’ve been unable to make payments. Judges view people who have applied for deferments or forbearances more favorably than those who just let the loans slip into default without trying to work something out with the student loan company.
As you can see, most people don’t qualify to have their student loan forgiven, but that doesn’t mean bankruptcy can’t offer you some relief for your student loan debts. If you think that you might be one of the few who qualifies for student loan debt forgiveness, contact Steidl and Steinberg so one of our attorneys can fully evaluate your situation.
Chapter 13 Bankruptcy as Relief from Your Student Loan Burden
Filing a Chapter 13 bankruptcy can provide those that don’t qualify to have their student loan debts forgiven in a Chapter 7 a chance to stop harassing collection letters and phone calls, wage garnishments and federal tax refund seizures by student loan companies for a three- to five-year period. The Chapter 13 bankruptcy allows you to repay what you can afford toward the student loans for the term of the bankruptcy. It is not a cure-all since you may still owe some or even most of your student loan debt at the end of the bankruptcy, but it can give you the breathing room you need now with the hope that you’ll be in a better financial situation to repay the student loans at the end of the bankruptcy.
People can be in a Chapter 13 bankruptcy for three to five years. During the term of the bankruptcy, the student loan company can’t call you, send you letters, garnish your wages or seize your tax refund. The student loans will be paid a portion of what they’re owed through the bankruptcy, usually based on your ability to repay. This allows you to regain control of your finances and get the student loan companies off your back and out of your pocket.
A Chapter 13 bankruptcy is a good option to consider for those who are unable to pay their student loan payments, have been unable to come to a resolution with the student loan companies and think their economic situation is likely to improve over the next three to five years.
The combination of a rise in student loan debt and a bad job market has caused many people to have problems making their student loan payments. While student loan companies offer help to some of their struggling customers, they do not agree to help everyone. For those who have been unable to get help with their payments from their student loan companies, a bankruptcy can be good way to get relief from their student loans and get an opportunity to get back on their feet.