Student Loans In Bankruptcy

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Student loans are not dischargeable in bankruptcy unless you can show that your loan payment imposes an "undue hardship" on you, your family, and your 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.

It is almost impossible to show an undue hardship unless you are physically unable to work and the chances of your obtaining any type of gainful employment in the future are non-existent.

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. 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 appear before the judge to explain your hardship. This is not an easy task, so if your student loans are the main part of your debt, you would be better off not facing the harshness of bankruptcy as courts are extremely reluctant to discharge student loans.

Consolidating Your Loans Under Chapter 13

Although you may not totally eliminate student loans in bankruptcy, you can consolidate them, with your other bills, in a Chapter 13 proceeding. Under this chapter, you can propose a repayment plan in which to pay your creditors over three to five years. For a Chapter 13 bankruptcy, 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 changes in the consumer price index. Chapter 13 will also stop collection action against you.

If you include your student loans in a Chapter 13 repayment plan, depending on certain factors such as the size of the loan, the number and amount of your other debts, and the amount of your disposable income, you might be able to make a dent in the loan balance over the life of your plan. However, you will still owe whatever student loan debt remains when you complete your plan.

Challenging the Loan Balance

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.

In a Chapter 13 bankruptcy, you can use an objection to the claim of the holder of a student loan to get a court's determination of your rights. Once a judge decides what is properly owed, the bankruptcy court decision is binding on the lender even if the repayment period on the loan stretches beyond the end of the bankruptcy plan.

Government Collection Procedures on Defaulted Student Loans

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% and collection agency "commission" fees of approximately 28% 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 Alternatives

Depending on how far in default you are on your student loan 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

However you decide to deal with your mounting student loans, it's best to tackle the problem as soon as possible to avoid paying more in the long run.

Related Web links:

- Glossary of Bankruptcy Terms
- FSA Collections
- Bankruptcy Message Board for more help