Many individuals work very hard to obtain advanced education. Unfortunately, student loans can get hefty, placing scholars in significant debt.
The U.S. Department of Education reports that federal student loan default rates are on the rise. During the first two years of student loan repayment periods, 8.8 percent of loan holders defaulted in the 2009 fiscal year. That number rose by 0.3 percent in the 2010 fiscal year.
While it is difficult to discharge student debt through the bankruptcy process, other financial strategies may be available to help you address your educational debt.
Many student loan agreements provide for a postgraduation buffer period, which grants graduates some extra time before their payments become due. After the grace period expires, however, if you are struggling to find a job and make your payments, you should not wait until you are in default to try to work with your lender. It may help to contact your lender as soon as you anticipate serious financial problems. In doing so, you could potentially work out a payment plan. Furthermore, in some circumstances, your lender may be willing to defer payment due dates.
While it is extremely difficult to discharge student debt through a Chapter 7 bankruptcy, it is possible under extreme financial circumstances. To do so, you must show that payment of the debt would impose an "undue hardship" on you and your family.
Courts use varied tests to evaluate on a case-by-case basis whether a particular student has demonstrated an undue hardship. Many courts use the "Brunner test", a 30-year-old U.S. Court of Appeals decision. Under this standard, the petitioner must show all of the following:
- The debtor cannot maintain a minimal standard of living (based on income and expenses) if forced to repay student loans.
- Additional circumstances exist that indicate that the debtor's state of affairs is likely to persist for a significant portion of the repayment period.
- The debtor has made good faith efforts to repay the student loans.
Courts rarely discharge student loans using this test because few individuals meet the test's circumstantial threshold. Even if you cannot prove undue hardship, you still might want to consider repaying your loans through a Chapter 13 bankruptcy plan.
In Chapter 13 reorganization, you may submit to the court a 3- to 5-year plan to repay your creditors over time. Your payment strategy will help you catch up on your debts. If you cannot discharge your student loans, there are still advantages to filing a Chapter 13 bankruptcy.
For example, your Chapter 13 plan as approved by the court will determine the amount of your student loan payments - not your loan holder, so you may pay a lower monthly amount during the plan period. While you work through your repayment plan, collectors cannot take legal action against you.
Many have built up student debt in the quest for higher education, hoping that newly acquired skills will provide the bases for better employment and stable financial futures. Nevertheless, with a struggling economy and difficult job market, it is tough to make ends meet.
If you are drowning in student debt, you may want to speak to a knowledgeable bankruptcy attorney about your current financial situation. A lawyer who has had other clients with excessive student loans can help you establish a solid plan.