Student loan debt can be a huge issue. They are around long after graduation and can be difficult to manage with other debts. Student loans are not dischargeable in bankruptcy. This is a non-dischargeable debt. These debts remain after bankruptcyand you must repay it.
There is one exception; some student loans can be considered an undue hardship, which means the loan can be discharged or eliminated if the loan payments are an extreme burden on you financially.
Show Your Hardship to the Bankruptcy Court
The first step to proving undo hardship is to file a separate complaint to seek discharge of your student loan debt. Next you will have a pretrial hearing on your complaint, and then a trial on your complaint to discharge your student loan debt. This will be a challenge. You will have to show and prove the following:
- That in your current situation, you can't maintain a minimum standard of living and repay your loans
- Your bad financial situation is likely tocontinue
- You made honest efforts to pay off the loans
It isvery hard to show undue hardship unless you are
physically unable to work and your situation is not likely to improve. If your student loan makes up most of your debt, it probably would not be in your best interest to attempt this unless you are disabled.
In the past, some privately funded student loans could be discharged in a Chapter 7 bankruptcy. However, the law changed with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Now, any education loan that qualifies for a tax deduction is non-dischargeable, unless you show "undue hardship."
Loan Consolidation and Chapter 13 Cases
Consolidating your student loans with other debts in a Chapter 13 case may be an option if you can't show unduehardship. In Chapter 13, you work out a plan to repay your debts over three to five years. Collection will stop actions against you and the chapter 13 plan may lower your monthly payments.
In order to file a chapter 13, you need a stable income with disposable income. Disposable income means money left after paying for necessities. You can't have more than $1,081,400 in secured debt (debt involving property that your creditor mighttake if you don't make your payments) and $360,475 in unsecured debt. These amounts change on a regular basis to reflect updates in the Consumer Price Index.
If you include your student loan in a chapter 13 repayment plan, you may be able to lower the loan balance over the life of your repayment plan. In addition, you may be able to lower your monthly payment during the chapter 13 plan, depending on your disposable income. You will still owe whatever student loan debt remains when your plan is complete.
Challenging the Loan Balance
It is important to know the exact balance of your loan. Sometimes it is not always clear. Errors can happen when loans are transferred and sold to different lenders over the years.
In a Chapter 13 case, you can use an objection against the lender's student loan claim to get the court to determine your proper loan balance. Once a judge decides on the correct amount you owe, it 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 EducationTechnical Amendments of 1991 (HEA) eliminated all statutes of limitations, or time limits, for any collection action by a school, guaranty agency, or the United States under a federal loan program. This law also ended time limits for tax refund 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 case, the US Department of Education may:
- Tack collection fees of 25 percent and collection agency commission fees of approximately 28 percent onto the principal, interest and penalties you already owe
- Take your federal income tax refund until all your defaulted student loans are 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 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 real property
Repayment Alternatives
Depending on the status of your loan default, there are options that may be available to you:
- 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 put off repayment until your career and financial circumstances improve, or
- Consolidate all your student loans into one loan that spreads the payments over a longer period of time, often at lower interest rates
Whichever way you decide to deal with your increasing student loan, it is best to embark upon the problem as soon as possible to avoid paying more in the long run. Contact your Maryland Bankruptcy Attorney to determine if chapter 13 bankruptcy may assist you in your student loan debt. Contact your Montgomery County Bankruptcy Attorney to discuss options to assist you in repayment of your student loan debt.
Questions for Your Attorney
What steps must I take to show undue hardship in order to have my student loans discharged in bankruptcy?
Should I file Chapter 13 bankruptcy to get a handle on paying off my student loans and other bills? Will it damage my credit?
Can a lawyer help me work out a repayment plan with the student loan lender or can I do that myself?
Contact your Baltimore Bankruptcy Attorney to set up a free consultation to discuss your student loan debt and repayment options.