Does Bankruptcy Help With My Student Loans?
Yes! There are several ways that bankruptcy can help with your student loans.
First, although difficult, it is possible for some people to have their debts discharged in their bankruptcy.
Second, filing a Chapter 7 can help discharge other debts so you can focus solely on repaying your student loans after bankruptcy.
Third, filing a Chapter 13 can protect you from student loan collections for three-to-five years while you restructure in a Chapter 13.
CAN I GET RID OF MY STUDENT LOANS IN BANKRUPTCY?
At present, student loans can only be discharged if you can prove that not discharging them presents an “undue hardship” to you. In the 8th Circuit Court of Appeals, which is the Circuit that Minnesota is in, the standard is described as: “Simply put, if the debtor’s reasonable future financial resources will sufficiently cover payment of the student-loan debt – while still allowing for a minimal standard of living – then the debt should not be discharged.” Long v. Educational Credit Management Corp., 322 F.3d 549, 554-55 (8th Cir. 2003). This is a difficult, but not impossible standard to meet. The most common circumstances leading to a hardship discharge are if a person is permanently disabled or has another severe issue that prevents them from working or working to their full potential. If you believe that you would be a candidate to have your student loans discharged, you should meet with us to discuss your situation.
Discharging your student loans in bankruptcy requires a special procedure called an adversary proceeding which requires you to sue your student loan lenders after your bankruptcy case is concluded to prove that the student loans present an undue hardship.
More often, we counsel our clients on the best way to manage their student loans. Bankruptcy can be effective in helping our clients manage their student loans.
HOW DOES CHAPTER 7 AFFECT MY STUDENT LOANS?
Immediately upon filing a Chapter 7 bankruptcy petition, the automatic stay prohibits most creditors, including student loan creditors, from taking collection action against you during the Chapter 7 bankruptcy, which typically lasts about 90 days. During this time you can, but are not required to, make student loan payments. When your debts are discharged at the end of the Chapter 7, your student loans will again re-enter repayment. At this point, your other debt will have been greatly reduced or eliminated by your discharge, enabling you to focus your repayment efforts on your student loans.
HOW DOES CHAPTER 13 AFFECT MY STUDENT LOANS?
Immediately upon filing a Chapter 13 bankruptcy petition, the automatic stay prohibits certain creditors, including student loan creditors, from taking collection action against you during the Chapter 13 bankruptcy, which typically lasts between 3 and 5 years. During this 3-to-5-year period, your student loans are treated as any other unsecured debt (but are not discharged at the end). What this effectively means is that during the 3-to-5-year term of your Chapter 13, you do not pay your student loans directly, but instead receive a pro rata distribution of the monthly payments you pay under your Chapter 13 reorganization plan. At the end of the Chapter 13, the amount not paid on the student loan survives and there may be interest and penalty added to the account. We are seeing the student loan lenders treating the time spent in the Chapter 13 like a deferment or forbearance.
Chapter 13 is particularly helpful with private student loans that do not generally offer alternative repayment plans that Federal loans are eligible for.
WHAT OTHER HELP IS AVAILABLE?
Federal student loans offer a number of alternative repayment plans that make it easier to manage student loans. Examples include a graduated repayment plan which is modeled to start with low, affordable payments that increase as your earning potential is expected to increase; an extended payment plan which stretches payments out over 25 years; income-based or income-contingent repayment plans which set your payments at a percentage of your discretionary income with a 20 or 25-year term; and pay as you earn plan, which ties your payments to a percentage of your income. The Office of Federal Student Aid has an excellent website that explains these options in much greater detail: https://studentaid.ed.gov/sa/repay-loans/understand/plans
Federal student loans can also be consolidated into one single set of loans, with one single payment to simplify repayment.
Private student loans are not required to offer any alternative payment plans or assistance to borrowers. However, if you are having trouble paying private student loans, you should always ask your lender if they have any options available to help.
The National Student Loan Data System (NSLDS) is a central website that tracks all student loans. You can contact the National Student Loan Data System (NSLDS) here to get a free breakdown of all of your outstanding student loans.