It’s bad out there and we all know it. And right now, many students are faced with the fear of incurring thousands of dollars for years-long education, and how they are going to pay off the loans. If one doesn’t immediately find a job upon graduation, and isn’t able to defer loan payments, many such recent graduates face a strikingly common question: Can I file bankruptcy on my student loans?
An individual can file a Chapter 13 case if it can be shown that the loan payment imposes an “undue hardship” on the person, their family, and their dependents. Non-dischargeable debts are those debts that you cannot totally eliminate when you file for bankruptcy and will have to be paid by you. The new law gives these loans the same protection as the guaranteed loans. If you would like to discharge your student loans under the “undue hardship” exception, you must file a separate motion with the bankruptcy court and then stand before a judge to explain your hardship. This means that there is no one single standard that is applied, but the judgment instead rests on a case-by-case basis. Generally, an undue hardship discharge is available only when the debtor would be reduced to poverty for the life of the loan. It may be considered to be an undue hardship when a debtor has, in good faith, tried to repay a student loan but has been unable to fully repay it due to circumstances beyond his control.
Although you may not totally eliminate student loans in any bankruptcy, you can consolidate them, with your other bills, in a Chapter 13 proceeding. Under this chapter, you can create a repayment plan in which you pay your creditors over a period of time (usually three to five years). To do so, you’ll need a stable income with disposable income and must have no more than $1,010,650 in secured debt (debt involving property that your creditor might take if you don’t make your payments) and $336,900 in unsecured debt. These amounts are adjusted periodically to reflect current economic conditions. Chapter 13 will also stop collection action against you, providing these conditions are met.
In a proceeding under Chapter 7 of the Bankruptcy Code, it is presumed that many debts, including most loans, will be discharged or simply “wiped out.” Section 523(a)(8) of the Bankruptcy Code, however, provides that student loans cannot, for the most part, be discharged in a bankruptcy proceeding under Chapter 7. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, privately funded student loans are treated the same way that loans funded and guaranteed by the federal government or nonprofit institutions. Prior to the new law, if you had a loan from a private-sector lender that was not guaranteed, it could be discharged under chapter 7.
Sometimes you can challenge a student loan. Often, a student loan has been transferred between lenders many times, and it’s not clear just how much is owed or whether any charges in addition to the principal amount of the loan are in accordance with law.
There are many alternatives to bankruptcy – the age of the loan is not one of them. Student loans are usually not dischargeable in bankruptcy unless the bankruptcy court finds that the debtor has proven the necessary undue hardship.
Depending on how far in default you are on your payments, you may be able to:
- Work out a repayment plan with the student loan lender that stretches payments out over a longer period or calls for graduated payments that increase as your earning potential increases
- Get the lender to agree to defer repayment until your career and financial circumstances have improved
- Consolidate all your student loans into one loan that spreads the payments over a longer period of time, often at lower interest rates
The Higher Education Technical Amendments of 1991 (HEA) eliminated all statutes of limitations for any collection action by a school, guaranty agency, or the United States under a federal loan program. The amendments also eliminated all limitation periods for tax intercepts, wage garnishments, and other collection efforts.
If you’re not able to discharge your student loans in bankruptcy or establish a repayment plan in a Chapter 13 proceeding, the federal Department of Education has the right to:
- Tack collection fees of 25 percent and collection agency “commission” fees (approximately 28 percent) onto the principal, interest and penalties you already owe.
- Take your federal income tax refund until all your defaulted student loans have been paid.
- Garnish up to 15 percent of your wages, without suing you first.
- Take as much as $750 per month (up to 15 percent of your income) in federal benefits to which you might be entitled, including social security retirement and social security disability income, and apply that amount toward your outstanding defaulted student loan debt.
- Sue you for your outstanding student loan debt and place liens on your property.
Repayment is harder now than ever, but taking initiative to work out a problem before it gets the better of you will prove beneficial for you in both the short and long term.
This article is for information only and not to be taken as legal advice or counsel.
Karen Corbelli is a Redding-based legal document assistant armed with more than 20 years of legal experience. She can be reached at 515-5081 or kjparalegalservice@yahoo.com.
