Dear Dr. Don,
I have student loans outstanding after graduating from college in 1997. I consolidated these loans long ago and the rate is quite high, 8 percent. We filed for Chapter 13 bankruptcy two years ago, and while our financial situation is turning around, money is tight. My loans are tied up and interest is accruing.

Do I have any options to wait until our Chapter 13 is dismissed and then haggle with them on the accrued interest? We can build up a lump sum until then. Or should I go ahead and pay the accrued interest in full and catch up with payments? I cannot get a clear answer from the lawyers or financial planners. Please advise!
— Barbara Baccalaureate

Dear Barbara,
There is a federal student aid ombudsman at the Department of Education who helps resolve disputes and solve other problems with federal student loans. The following is from the ombudsman’s website:

If you filed Chapter 7 or Chapter 13 bankruptcy after October 7, 1998, you may have your loan discharged only if the bankruptcy court finds that repayment would impose undue hardship on you and your dependents. This must be decided in an adversary proceeding in bankruptcy court after the conclusion of the bankruptcy. Your creditors will be present to challenge the request. The court uses a three-pronged test to determine hardship:

  • If you are 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 cannot prove that any one of the three requirements applies to you. If your loan is discharged, you will not have to repay your loan, and all collection activity on these loans ends. You would also regain eligibility for Title IV student loans. To get your loan discharged for reasons of bankruptcy, you must petition the bankruptcy court to reopen your case.

I don’t see much room for haggling in this process. If you have the ability to repay the accrued interest and become current on the payments, my handicapping has it that you won’t be successful in meeting the three-pronged test — but you should discuss this with your attorney. If that doesn’t help, contact the ombudsman.

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