Student loans have become one of the most serious debt problems that average Americans face today. With the cost of education rising and the job market struggling to recover from recession, a disturbing percentage of college graduates find themselves taking any job, however low the salary, just to meet basic living expenses. When notices about student loan repayment arrive in the mail, things begin to spiral out of control.
Is Bankruptcy an Option for College Graduates?
Usually, when credit card or other types of debts outweigh income by the kind of margin that many graduates face, bankruptcy court is a common option. Unfortunately, student loans have long been in a separate category, only subject to bankruptcy protection under very specific circumstances. Understanding exactly what these circumstances are will help you get an idea of whether you could be considered for bankruptcy. Because each situation is unique and because different courts have slightly different criteria for determining bankruptcy eligibility, you should consult with an attorney who is experienced in this complex field.
Different Types of Bankruptcy
Chapter 7 bankruptcy erases student loan debt. It is only a possibility if your loan payments place an “undue hardship” on you. Your idea of undue hardship may be different than that of the court, however—if you regularly pay for things like cell phone service and cable TV, the judge will not allow you to keep those things while dismissing your student loan.
Chapter 13 bankruptcy for student loans is a way to restructure your payments in a way that works with your current income. In the end, you will repay the full amount of the loan plus interest.
Your current income is the most important thing that affects your ability to be considered for bankruptcy. The court considers the following factors:
Likelihood of higher income in the near future. If the job market is such that you are almost certain to retain your current income for the foreseeable future, the court will respond accordingly. On the other hand, if you appear to have options for better employment, the court will probably deny you protection. Your repayment efforts so far. No matter what your situation, the court would like to see that you have made at least a few payments as proof of your intention to pay your debt.
Working with a Student Loan Bankruptcy Lawyer
As complex as bankruptcy law is, the section governing student loans is even more so. A lawyer with a thorough working knowledge of it is essential to making a successful case for bankruptcy. If you feel your situation makes it impossible to pay back your loan, consult with a good attorney to find out what your options are.
Some frequently asked questions about school loans and bankruptcy:
Q: If winning bankruptcy for school loans is so difficult, why try?
A: Federal school loans are treated much differently from credit card debt. If you fail to
pay your installments on time, the government will garnish your wages to get the money
Q: What will happen if I am simply unable to make payments?
A: After nine months of failing to keep up with payments, the government has the right
to call the entire debt due at once. You could lose everything you own as payment.
Q: How can I give myself the best chance for bankruptcy status?
A: Show your situation to an legal expert in school loan bankruptcy who can tell you
what steps you can take before going to court. The most helpful actions are those that
show your good faith efforts to pay your debt.
Q: Is bankruptcy a “free pass,” an easy way out?
A: It’s probably more difficult than you think to win an argument for bankruptcy. That’s
why you need the help of a lawyer to show clearly that you are absolutely unable to make
your payments and that your situation is not likely to improve any time soon.
The Law Office of Julio E. Portilla P.C., is always available to answer your questions. Feel free to contact us.