There is no doubt that student loan debt is a national crisis. Collecting on those debts has spawned a huge collection industry that is cashing in on Americans – both young and old. Presently about 5.9 million people are in behind in making student loan payments. Student loan payments are a crushing burden to a young person with a bachelor’s degree making less than $30,000 per year. Often there is simply not enough money to repay the debt. The New York Times reports that “nearly one in every six borrowers with a loan balance is in default. The amount of defaulted loans — $76 billion — is greater than the yearly tuition bill for all students at public two- and four-year colleges and universities, according to a survey of state education officials.”
Nearly all of these student loans are federally guaranteed, and last year the Education Department paid more than $1.4 billion to collection agencies and other groups to hunt down defaulters. To make matters worse, student loans are not dischargeable under the federal bankruptcy laws, except under extreme financial circumstances. The bankruptcy test is whether repayment of the debt would cause an “undue hardship” on the debtor or his family. Federal courts have placed an unreasonably high bar on this test. Essentially, to pass the undue hardship test the debtor must be out of work with no reasonable expectation of ever making enough money to repay the debt. If you have a job, or if there is any chance of having a job in the future, then you fail the test and the debt survives your bankruptcy.
On the other hand, while you may be enslaved to an inescapable student loan debt, you can still eliminate other troublesome debt and free up your income to repay your student loans. During your bankruptcy case student loan collection processes must stop. That could mean a reprieve of up to five years in a Chapter 13 case. If you are not yet in default, the collection process will reset after your bankruptcy. Once your other unsecure debt has been discharged, you can negotiate a reasonable repayment plan with your student loan lender. There are several different repayment programs that take your income and circumstances into consideration.
Dealing with student loans is a nightmare for many people, but with the right financial planning and hard work, it is possible to dig yourself out of debt. Contact an experienced bankruptcy attorney and discuss your options for eliminating or restructuring your student loan debts. Bankruptcy may help you find an answer to the student loan puzzle.