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Bankruptcy and College Loans

If you have pursued a post high school education, you have probably become well acquainted with the student loan process. Unfortunately, you may have also become acquainted with the current job market and the two just don’t mesh! As the years pass and student loan payments, along with your other expenses, become more and more difficult to meet monthly, the idea of filing for bankruptcy may take hold. Bankruptcy certainly does solve a lot of financial issues and relatively quickly. Your debt to income ratio can change overnight and your financial picture can certainly look rosier. What you need to know immediately is that the student debt you incurred for that education of your will not go the way of your credit card bills!

Student loans are virtually non-dischargeable debt. Undue hardship standards, created by Brunner v. New York State Higher Educ. Serv. Corp 831F. 2d 395 (2d Cir.1987) require certain conditions prevail:

  1. A minimal standard of living will be impossible
  2. This minimal standard of living will exist for a long period of time (a substantial portion of the loan repayment period) with no outlook for significant improvement
  3. The debtor has made repayment efforts (a standard in use has been repayments shown for the five years prior to a delinquency

(Be aware that if you have perhaps filed for bankruptcy, this filing does not automatically determine a hardship status. You must also file a petition [adversary proceeding] which requests a hardship determination.)

This standard is very difficult to prove. Obviously, if you are successful your entire student loan is cancelled. If you cannot meet the burden of proof set by this standard, what options are there? First, as alluded to earlier you can forestall the collection process by filing for Chapter 13 bankruptcy. Student loans can be placed in forbearance during the course of the 13 proceedings. Chapter 13 allows you time to reorganize your finances and set up a repayment plan for all your debts. It should be noted that balances on student loans will remain and interest will continue to post during the time of your repayment plan. Chapter 13 just gives you time to reassess, reorganize, rearrange, and, hopefully, come out stronger at the end of your plan. Second, remember that federal regulations (59 Fed. Reg. 22473) will only allow a 10% garnishment of your take home pay to be applied toward outstanding student loan balances. In addition, look at these options:

  1. There are several repayment plans which deserve serious consideration. They are income-based and pay-as-you-earn programs.
  2. You can try to consolidate your loans and shop for a lower interest rate.
  3. Check into deferment and forbearance which deal specifically with reported changes in personal circumstances. (There are specified time limits involved)

Whichever path is chosen, please avoid default at all costs. Default negatively reflects on your credit and can trigger garnishment, etc. If you have defaulted on a student loan, enter into rehabilitation of that loan which means you will make payments, obviously not full payments, for at least 9-10 months. As always, consult a professional for the most appropriate avenue for you to pursue.

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