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Bankruptcy May Be Your Option

Chapter 13 payment plan may help manage student loan debt

Many posts have been written about the difficulty of discharging student loan debt in bankruptcy including recently on our site. The undue hardship test for totally erasing a student loan debt is a difficult hill to climb. But other options may be available, if not to discharge the debt, at least to manage it.

While Chapter 7 bankruptcy is design to “wipe the slate clean” of debts that qualify for discharge, Chapter 13 bankruptcy is more of a “management” plan. Over up to five years, a debtor can use a Chapter 13 plan to reduce some debt so that, after the five-year period, the remaining debts are much more manageable. Some debtors are using Chapter 13 to reduce their student loan debt in hopes of making it easier to continue to pay it off after those 60 months.

The Consumer Financial Protection Bureau says that about $1.2 trillion is now owed in student loan debt, far more than the total for national credit card debt. Several factors favor the inclusion of that debt in a Chapter 13 bankruptcy plan if the debt cannot be discharged in Chapter 7.

First, wages have not increased proportionately with the price of a college degree. Those paying for their college educations and the interest on the loans have not necessarily gotten value for their money. As the amount of those loans has risen to meet tuition costs, the salaries for jobs waiting on the other side of the diploma have not risen at the same rate.

Second, having a high student loan debt balance and high monthly payments are bad for the economy. As students graduate from college in Oklahoma, many would likely start looking for a house to buy or a new car, but the loan payments are so high that they can’t qualify for a mortgage or consumer loan.

Third, companies that make private student loans are becoming more aggressive about collecting the debt. While they can’t “repossess” the college education, they can get a judgment and file it with the court which can either allow them to take property the debtor owns or make it more difficult for the debtor to borrow other money.

If you are struggling with student loan debt, don’t be discouraged by the “undue hardship” test. A bankruptcy attorney may be able to help you find other avenues to reduce, or at least manage, the payments.

Source: Pittsburgh Post-Gazette, “Student loan debtors using Chapter 13 bankruptcy to buy time on payments,” Tim Grant, Aug. 2, 2015

 

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