In March 2012 a United States report showed that for the first time in history student loan debt in America had surpassed credit card debt. It was a startling, yet not completely unexpected figure. More people are going to college, college tuition is constantly on the rise, financial aid is readily available, and jobs are scarce after graduation. The average amount of student loan debt in the US today is nearly $27,000. How can an individual struggling to find a job ever find a way to pay off that massive amount of debt? Here’s how declaring bankruptcy may be the answer:
Student loans are typically placed into a category of debt that cannot be wiped away through the normal Chapter 7 bankruptcy rules. Although it is rare, there are some cases where student loan debt may be eligible to be erased if the debtor can prove that making their payments will cause them “undue hardship”. The bankruptcy court has various tests that they use to determine whether or not a hardship exists for the debtor. One of these tests is known as the Brunner test and requires showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans.
Chapter 13 bankruptcy rules are a little different when it comes to student loans. A Chapter 13 bankruptcy allows the debtor to “reorganize” their debts and pay them back through a court ordered 3-5 year repayment plan. This can be beneficial for many reasons, but one of the most important is that the student loan company can no longer set the monthly payment. The monthly payment for Chapter 13 plans are created and overseen by the bankruptcy trustee. The debtor simply mails a payment to his/her bankruptcy trustee each month for the duration of the plan and the trustee handles the disbursement. Another great thing about a Chapter 13 bankruptcy is that at the end of the 3-5 year repayment plan the debtor is not only debt free, but caught up on all secured payments like their mortgage, vehicle, and in our case student loans.
Claiming bankruptcy because of student loans is unfortunately becoming more common each year. Whether you are hiring a bankruptcy attorney or trying your hand at a do it yourself bankruptcy, remember that you must list all the debts in your name must be listed on your bankruptcy paperwork. Don’t get discouraged if you find out that your student loans cannot be erased with a bankruptcy, remember that after your case is completed you will be debt free otherwise and in a healthier financial state to make timely student loan payments. Doing this will help not only pay down your student loan debt, but help you rebuild your credit quickly after your bankruptcy is completed.