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Managing Student Loans During Bankruptcy

 A recent study shows that one in four borrowers have trouble repaying their student loans. The study was released by the Institute of Higher Education Policy, a Washington nonprofit organization, and reveals that 26 percent of borrowers who entered repayment in 2005 became delinquent within the first five years of repayment, and 15 percent of borrowers defaulted. That means 41 percent of borrowers are either delinquent or in default on their student loans during the first five years!

Student loans are generally not dischargeable in bankruptcy. However, in some extreme situations, the bankruptcy court can determine that repaying the student loan debt will create an “undue hardship” on the debtor. This standard is very difficult to meet and requires the debtor to prove that he or she is unable to pay anything towards the student loan debt and maintain a minimum standard of living, and that this condition is likely to continue. Individuals who are totally and permanently disabled, and are unable to work will sometimes meet the requirement for an “undue hardship” discharge.

If you are unable to pass the undue hardship test, there are other options. First, during a bankruptcy a student loan collector is strictly forbidden from taking collection action against you. Interest will accrue and is added to your loan balance at the conclusion of the bankruptcy case.

Second, if the student loan was delinquent, but not defaulted when you filed bankruptcy, your account will be re-aged at the end of your case. A loan is not in default until it is delinquent for 270 days. The bankruptcy stay may give you an opportunity to restructure your finances to afford your repayment terms. If the student loan was defaulted prior to the bankruptcy, the lender may offer you a loan rehabilitation program.

Third, there are repayment options after your bankruptcy case ends. One of the more popular programs is the Income Based Repayment Plan which limits your loan repayment to 15% of your income and offers loan forgiveness after 25 years of repayment (or 10 years for public service employees).

If you have student loans that you cannot afford, speak with an experienced bankruptcy attorney and explore your financial options. Your attorney can explain how the federal laws can help you eliminate, manage, or restructure your debts, including your student loans.