I met with a potential client who had recently completed seven years of college, which included three years of graduate school. He graduated with more than $300,000.00 worth of student loan debt and was having great difficulty finding a decent job. More than six months had elapsed since he had graduated, and so the student loan creditors were demanding huge monthly payments on this enormous debt. He came to see me to discuss his options. The first option we discussed was Chapter 7, which allows a person to discharge student loans if they can prove that the repayment of these loans would be a substantial hardship.
Unfortunately, the Supreme Court has defined substantial hardship very restrictively. My client would need to pass a three-prong test, and he would have to be able to show that he could not support himself and provide for even the basic necessities of life.
Since he was living at home with his parents, most of his creature comforts were paid for and so he failed that prong of the test. Even if he had been able to show that he could not provide for the basic necessities of life, he would need to show that that was going to be the case for the next 20 years. Since he was able-bodied, he could certainly find some type of job and provide for the basic necessities of life in the future. The third prong of the test would require him to show that he had made regular, good faith payments on the student loans before he suffered some type of a calamity that prevented him from making future payments on the loans. Since he had recently graduated, he had really not made any payments at all on these student loans. Therefore, I told him the truth, that these student loans absolutely could not be discharged in a Chapter 7 proceeding.
He then informed me that his parents had co-signed these student loans. He was afraid the student loan creditors would be demanding payment from them and possibly attaching their wages or seizing their tax refunds or bank accounts. I then told him that he could possibly file a Chapter 13 reorganization bankruptcy which would stop all collection proceedings by the student loan creditors for the next five years.
During those five years he would pay as much as he possibly could to a Trustee who would then distribute those payments to the student loan creditors. The monthly payment would be based on what he could afford to pay after deducting his living expenses from his net monthly income. Therefore, during the next five years, the student loan creditors would not be allowed to contact him, attach his wages, seize a bank account, or take his tax refunds. Chapter 13 also provides for a co-debtor stay which means that, as long as he was in Chapter 13 for the next five years, the student loan creditors could also not collect from his parents and could not attach their wages or take any other action against them. When the five year plan would be completed, he would still owe the balance of the student loan debt, but hopefully at that point he would have a decent job and could afford to make regular payments on those student loan obligations.