It is a financial fact of life that many people take five years, ten years, or even longer to pay off the debt they incurred to get an education. In fact, the inability to repay student loans is what pushes many people into bankruptcy, in conjunction with other factors like loss of income, uninsured medical bills, exorbitant credit card interest rates and payments, and other misfortunes. If student loans are the primary factor holding someone in debt bondage, can bankruptcy help?
At first glance, the answer appears to be “no”. Student loans (debt incurred for educational expenses backed by a private institutions or governmental agencies) are generally non-dischargeable in bankruptcy. Think of it as a tradeoff: the government lends nearly anyone looking to better him or herself through education money to go to school, but expects to be repaid no matter how dire the person’s situation becomes later in life. The “undue hardship” required to fit into the exception to the rule must be severe; I have heard it said that unless the debtor is on a respirator that is about to be shut off for non-payment of a power bill, it is a waste of time to try.
However, what a debtor usually CAN do is consolidate his or her debts into a Chapter 13 plan and work the repayment of a student loan into the plan, along with his other debts, in an orderly manner without being harassed by the creditor for payment. Any efforts to collect the student loan would stop while the plan is in place (usually five years), and without bankruptcy protection, those efforts can be severe – wage garnishments, tax refund seizures, and the addition of penalties and fees. Any balance remaining on the student loan would have to be paid after the Chapter 13 plan ends, but typically by then other unsecured debts are discharged and the debtor’s income has (hopefully) increased, so that he or she has more income available to afford the student loan payments.
So, the bottom line – bankruptcy cannot get RID of student loans, but by bringing order to the rest of a debtor’s financial condition, it can make them more bearable.
If you or someone you know is in financial distress because of student loans, call our firm for a free consultation, or visit Leone Noble & Seate, LLP to learn more.