Student loans are a serious problem for millions of Americans. Long after graduation, many people find themselves still facing thousands of dollars in debt and years of payments. Although it might feel like you will never get out of debt, there are many steps you can take to get on track with your student loans.
The Deferment Trap
I see far too many clients whose “solution” to student loan debt is to simply keep putting it off. It is easy to fall into that trap. “Deferring” payments on your student loan may seem attractive and may be okay in certain circumstances for a limited timeframe. It is never a permanent or even long-term answer- you are only postponing the problem. If you think about it, if your overall debt (including student loans) is more than you can afford to pay back– and if instead of paying your student loans you pay other unsecured debt that you might be able to bankrupt– you are paying the wrong debt. Repaying your student loans should be your priority. For the vast majority of people, student loan debt cannot be bankrupted. If you must choose, then choose wisely. Put your money where it helps you the most.
What Bankruptcy Can and Cannot Do For Your Student Loans
Chapter 7-The Undue Hardship Test
Under federal law, most student loans are not discharged by a bankruptcy filing. In order for your student loans to be forgiven, you must prove in court that they impose an undue hardship on you, your family and your dependents. (You and I must actually file a separate lawsuit–called an ”adversary proceeding”– as an additional part of your bankruptcy case.) This is a high standard (“burden of proof”) to satisfy, and most individuals cannot meet the required standard of proof. But some may. One of my important jobs as your Chapter 7 bankruptcy attorney is to look at the facts of your case and help you determine whether you can meet the undue hardship test.
Why Chapter 13 May Not Help
Unfortunately, if you are already in default (behind) on your student loan payments the Chapter 13 process will not allow you to separately classify and treat your student loan debt more favorably than your other unsecured creditors. You cannot, for example, do a payment plan that pays your student loan debt 100% and only pays your other unsecured creditors 10%– you must lump them all in the same pot and pay them the same percentage.
However, if you are up to date on your student loan payments you are allowed to keep making your regular payments even while you are in the Chapter 13 case. This is a very important distinction that many lawyers may not even mention to you. Don’t let someone waste five years of your life in a Chapter 13 case thats puts you even further behind on your student loans than you are right now!
Other Relief Outside of or After Bankruptcy
Even if you cannot meet the undue hardship test, Chapter 7 can help. A Chapter 7 discharge of your other debt can free you to focus your income like a laser on paying your student loans. So you might be able to bring your student loan payments current, or, if not, you may at last be able to free up your income enough to pursue other federal programs for dealing with your student loans, such as the William D. Ford program. There are now a number of income-based and other payment options available through such programs that are well worth understanding and exploring. Don’t ignore the problem. Get some help.
Guidance from a bankruptcy lawyer can help you decide whether filing for bankruptcy protection should be part of your strategy for handling your on student loan debt.
Set up your free consultation today by calling my office at 865-470-4250 or contacting me online