To many people with large student loans, their financial future looks bleak, especially if their expensive education has not led to a good-paying job. Often the debt collectors for these loans are unusually ruthless and inflexible, and in most cases, the indebtedness cannot be discharged in bankruptcy like most other debt can.
In response to lender’s lobbyists, Congress gave special powers to student loan collectors. Depending on the lender, they can garnish wages without a court order, intercept your IRS refund, take money from Social Security checks, charge collection fees of 25% of the loan, charge commission fees of 28%, etc..
The Bankruptcy Code provides that although student loans are normally not dischargeable under either Chapter 7 or Chapter 13, they can in fact be discharged under Section 523(a)(8)(A&B) in cases of “Undue Hardship.” Since court precedent definitions and common sense definitions are not always the same, the question then becomes, how are the courts defining “undue hardship?” Bankruptcy judges have historically given very few “undue hardship” discharges for student loans. Some districts are beginning to give more. Here in the Atlanta area (Northern District of Georgia), they generally want proof that you will probably never be able to pay back your student loan, typically due to permanent medical reasons. Being unable to find an adequately-paying job is not considered “undue hardship” for bankruptcy dischargeability purposes. To make things worse, a motion for “undue hardship” treatment involves some expensive legal work.
BUT don’t give up all hope yet- there are several things that you can do. Here are four:
1. For breathing room, you may want to pursue a student loan “deferment” or “forbearance” through your lender. These typically last from one to three years, though a few have longer maximums. There are many kinds of these – for unemployment, economic hardship, temporary disability, military service, rehab training programs, in-school time, discretionary forbearance for poor health (no maximum), mandatory forbearance for living in a disaster area, etc.. The main differences are that a “deferment” normally requires paperwork, whereas forbearance can normally be done by phone; and the government will pay interest on a subsidized loan during a deferment, but will have an interest bill waiting for you after a forbearance. For a lot more information on these, go to www.ombudsman.ed.gov and under the tab “Repay your loans,” go to the tab marked “Deferment and Forbearance.”
2. If you have a lot of other debt, filing either Chapter 7 or Chapter 13 bankruptcy may cut down your debt enough to allow you to put a much greater share of your income into paying down your student loan. It is illogical to be drowning in student loan debt, credit card bills, and medical bills, just getting in deeper and deeper, destroying your credit and getting sued and garnished, when it is possible to reduce or eliminate fully the cards and medical bills and pay the student loan once and for all.
3. If you can qualify for Chapter 13 bankruptcy (starting point: a regular income of some type), then upon filing your 13, all collection efforts, such as lawsuits and wage garnishments, must stop by law, including on student loans. Under your Chapter 13 plan, you then calculate what payment you can afford, and make that payment for 3 or 5 years. (Unfortunately, at the end of your Chapter 13 you will get a bill for the interest they had to stop collecting during the bankruptcy.) Hopefully, after that you will be in a better position to resume the full loan payment on the remaining balance. But if you are not . . .
4. If your student loan payment after completing a Chapter 13 (or a Chapter 7) bankruptcy is still too large an expense for a reasonable budget, you can probably file another Chapter 13 bankruptcy immediately after the first one, if you meet all the other requirements to do so. (You can include the accumulated interest from the last bankruptcy in this one.) This time it will not discharge your debts, but it may give badly-needed breathing room by letting you make an affordable payment for several years to bring the balance down.
These are complicated areas with many nuances; although most people can handle point #1 above by themselves, for #2, 3, and 4 you need to consult with an experienced bankruptcy attorney.