Can You File Bankruptcy on Student Loans?

US student loan debt is on a lot of minds these days. Recent data shows that 43.4 million US borrowers have more than $1.6 trillion in student loan debt with the numbers continuing to grow. Currently, the average student loan debt balance is $37,014. That number is based on federal loans, and private lending averages may be even higher. While many people are able to make regular payments on this debt, for various reasons, some borrowers find they are unable to pay on time. This brings up questions about student loan debt and bankruptcy.

Student Loan Debt: What Are the Options When You Can’t Pay?

Student loans can be helpful in procuring an education, but if you come into a difficult financial situation, they may feel like they’re weighing you down. Sometimes borrowers have difficulty finding a job in their field after graduation, or their first job doesn’t pay nearly as well as expected. They may also have additional expenses they didn’t see coming, like medical bills, moving expenses, rising living costs, car repair bills, or the need to buy a new vehicle, etc. In some situations, you may find that you just don’t have the monthly payment anymore. There are several possibilities for borrowers whose student debt has become overwhelming for any reason.

Can You File Bankruptcy On Student Loans?

Student loans are not usually included in a Chapter 7 bankruptcy, where most debts are erased. You can apply to have them discharged in your bankruptcy on the grounds that they will cause an “undue hardship” to you and your dependents, but there are fairly strict requirements for this to happen. In this “adversary proceeding,” your Albuquerque bankruptcy attorney will need to show the following to the court:

• Continuing to pay your student loans would result in an inability to provide a “minimal” standard of living for yourself and any dependents you have, due to your current income and bills.
• This situation will persist throughout the loan’s repayment term. In other words, it is unlikely that your income will significantly improve or your other bills will disappear during this time.
• Despite your struggles, you have made a “good faith” attempt to pay back your loans until now.

If the court finds that you do not meet all three of these requirements, it may decline to wipe out your student loans and you will have to repay them. However, in many cases, getting rid of other debts may free up enough money to continue with the student debt payments. If it doesn’t, you can consider moving on to a Chapter 13 bankruptcy. Unlike Chapter 7, Chapter 13 doesn’t clear all of your debt. Instead, your debt is restructured with a plan for you to pay it off in three to five years. If you do this, your monthly student loan payment may be reduced in an effort to make it more affordable for you.

What Are the Other Options to Cancel Student Loan Debt?

It’s not always possible to get all your student loan debt canceled, but in some situations, you can get some of it discharged, or set up an easier payment plan. Your bankruptcy attorney will go over the details of your particular situation and explain the options, but here are some alternatives that may work in certain situations:

• Income-Driven Repayment plans (IDR). This is a good option for federal student loans, allowing you to get a lower monthly payment based on a percentage of your actual income, and apply for student loan debt forgiveness on any balance that remains after 20 years or more.
• Federal Loan Rehabilitation. This option is designed for federal student loans that have gone into default or gone 270 days without a payment. In this program, you’ll have to make on-time monthly payments at 15 percent of your income for nine months before your loan will come out of default and this will be reflected on your credit report. If 15 percent of your income isn’t doable because of other debts, this may not be the best option.
• Federal Loan Consolidation. If you have multiple federal loans, you can consolidate them with the understanding that you will make three on-time monthly payments before getting out of default. You can combine this option with IDR for a lower monthly payment. In this case, the default notation will remain on your credit report.
• Private Loan Modification or Settlement. We’ve mostly talked about federal loans so far because they’re the most common type of student debt, but there are some options for private borrowers. In these cases, you’ll need to work things out directly with the lender. Sometimes they can be persuaded to offer you a lower monthly payment if it is the only way to collect any of the money you owe them. After all, it’s better for them to get $200 each month than it is to send you a $300 bill each month and get nothing at all. However, negotiating with a creditor can be tricky, so it may be better to let a skilled bankruptcy attorney communicate with them on your behalf.

New Mexico Financial and Family Law: Secure a Bankruptcy Attorney for Your Case

The possibilities for addressing student loan debt or other unpaid bills can be confusing, and you may not know what to choose, or how to take the next steps. But it’s important to understand that the longer you wait to deal with these financial challenges, the worse they’re likely to get. Dealing with the situation as soon as possible can allow you to take back some control and begin reducing your debt.

At New Mexico Financial and Family Law, we’re always here to help if you have questions or need guidance on improving your financial situation. We’ll go over all the choices, answering your questions and helping if you want to move forward with a plan. The sooner you call us for a free consultation, the sooner you can get on your way to a brighter financial future. Call today at (505) 503-1637.