Student Loan Doldrums…Can Bankruptcy Help Me?

Published Wednesday, July 15, 2009 @ 4:11 pm

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Ah, the student loan: so easy to get now, so eager to overstay its welcome later. Student loans are notoriously difficult to shake. Defaulting on student loans is no joke: how’s this for a laundry list of potential consequences? You won’t be able to get any more student loans. Your credit will suffer as the lender reports missed payments. You could have your wages, up to an amount equal to 15% of your income, garnished (that is, the loan holder can go straight into your paycheck without bothering to pass through “Go”, i.e. you, before they collect $200). You can have your tax return money, both state and federal, intercepted. You will have fees added to cover the collection effort (up to 25%!!!) You could have late fees added on. You could be sued.

Yikes! So what can you do if your student loans have you backed into the corner? You can’t even count on the statute of limitations to bail you out the way some people did in the past, because the statute of limitations essentially no longer exists for student loans. Can bankruptcy help you out? Unfortunately, bankruptcy does not allow you to discharge student loans, absent a showing of undue hardship. Undue hardship is extremely difficult to prove. You will have to show that you are under extreme financial hardship and paying the loans will prohibit you and your family from living at even a minimal standard, that your difficulties are likely to persist, and that you have tried in good faith to pay back the debt. That said, there are some ways that bankruptcy can at least put a stop to collection.

•    While in a Chapter 13, you will not have to pay on your student loans. This can give you some breathing room to address whatever issues have caused you to fall behind.. Perhaps you only need some time to advance in your career. Maybe you need to address medical issues which might have put you behind. A Chapter 13 bankruptcy will stop the collection efforts, stop the phone calls, and stop a garnishment. You can stay in the Chapter 13 for up to 5 years, giving you time to put your finances back in order. However, keep in mind that on the other end of the repayment plan, you will still be responsible for the total amount of the loan, and interest will continue to accrue for the duration of your repayment plan.

•    Bankruptcy can help you take care of those debts that ARE dischargeable, and this frees up your cash flow to address debts, such as student loans, which aren’t dischargeable. If you have a significant amount of other unsecured debt, wouldn’t it be great to unload that burden and focus on paying down those student loans?

As you can see, bankruptcy won’t get rid of the student loan altogether, but it can buy you some time. If you’re suffering with student loan debt, talk with a bankruptcy attorney today to discuss your options.

In North Carolina, call 1-800-899-1414 to discuss your options. The Law Offices of John T. Orcutt has convenient office locations in Raleigh, Durham, Wilson and Fayetteville.

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