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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Student loans in bankruptcy
Dear Dr. Don,
I have student loans that date back about 10
years. I have made some payments on them, but for the most
part they have either been deferred or defaulted on.
Can I file bankruptcy on them,
and if so, how? If not, is there a way that I can start paying
on them and get the interest to stop accruing. My student
loans total about $25,000, and I will never be able to pay them
back with the interest accruing.
Grappling Ginger
Dear Ginger,
Discharging student loans in bankruptcy
is very difficult to do. Provisions for discharging student loans
in bankruptcy were changed in 1998. The bankruptcy court has to
rule that repayment would cause undue hardship for you or your dependents.
According to the Federal
Student Aid Ombudsman (FSAO) Web site:
The
court uses a three-pronged test to determine hardship:
- If you were forced to repay the loan, you would
not be able to maintain a minimal standard of living.
- There is evidence that this hardship will continue
for a significant portion of the loan repayment period.
- You made good-faith efforts to repay the loan before
filing bankruptcy (usually this means you have been in repayment
for a minimum of five years).
Your loan will not be discharged if you are unable
to satisfy any one of the three requirements. If your loan is discharged,
you will not have to repay your loan, and all collection activity
on these loans ends.
The Ombudsman site also describes situations where
you may be able to cancel or discharge your student loan debt:
You may be able to rehabilitate your loans. Under
this program you work with your loan servicer to set up a monthly
payment plan. After successfully completing 12 monthly payments,
the loan is sold to another loan servicer. You then have nine years
to pay off the loan balance.
Loan rehabilitation can remove the default status
of your prior loans from your credit report and, if you qualify,
all derogatory information about the loans may be removed from your
credit report. The information
on rehabilitating your student loans also comes from the Federal
Student Aid Ombudsman site. It's a fresh start, but you'’re not
stopping interest from accruing and your payments over the nine
years could be much higher then they were during the 12-month rehabilitation
period.
Other than to say that you can't pay the loans with
interest, you haven't described your financial situation. I'd recommend
that you consult with a bankruptcy attorney to discuss your chances
at discharging these loans in a bankruptcy filing. You will have
to list all your debts when filing for bankruptcy, not just the
student loans. The attorney can also let you know whether a Chapter
13 filing with its repayment plan might make more sense then a Chapter
7 liquidation of nonexempt assets.
-- Posted: May 28, 2003
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