Bankruptcy can help with student debt
Despite what you may have heard, the truly desperate can have their student loan debt forgiven in bankruptcy court. But it's not easy.
Whenever you read about the immense amount of outstanding student loan debt in this country, you invariably read that student loan debt cannot be discharged in bankruptcy court.
Well, that's not quite the case. A discharge of student loan can be done if your circumstances are sufficiently and demonstrably dire. You also have to prove to the court that there's no reason to hope that they'll get any better for the life of the loan, according to an excellent Ron Lieber story in The New York Times.
In other words, bad luck and hard times are your lot in life, and you must convince the judge of that fact.
It didn't used to be that way. Student loan debt was dischargeable in bankruptcy before the mid-1970s. Then Congress began gradually tightening the rules for federally guaranteed student loans, and it finally eliminated bankruptcy discharge for private student loans -- including those issued by banks -- in 2005. (FinAid.org has an interesting timeline of the changes here.)
"That essentially lumps student loan debt in with child support and criminal fines -- other types of debt that can't be discharged," Kayla Webley observed earlier this year on Time.
(While programs exist to forgive or reduce federal student loan payments, those options aren't available for students who took or take on private student loan debt. That's why people who are advocating a change in the bankruptcy laws are focusing on making private student loans dischargeable in bankruptcy.)
If you borrowed it, you have to repay it -- unless you can prove to the bankruptcy judge that your student loans are causing an "undue hardship" for you and your dependents. How do you make your case? (Post continues below.)
A federal website that explains ways to have federal student loan debt canceled, forgiven or discharged explains the bankruptcy courts' three-part test (and you have to meet each and every one of these):
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).
Many judges have adopted a "certainty of hopelessness" test, Lieber writes, which requires them to believe that you truly have no hope of earning an adequate living now and for years to come.
These cases can drag on for years, and the government may fight you every step of the way. (A Palm Beach Post story this week, by the way, detailed how the feds have greatly increased the number of lawsuits they file against student loan defaulters.) The Times story focuses on a 31-year-old college grad, now legally blind, who first went to bankruptcy court six years ago. He's seeking the discharge of $89,000 in student loans.
The good news is, studies mentioned by the Times show that 39% or more of undue hardship applicants are successful in getting part or all of their student loan debt forgiven. Fewer than 1,000 people try it each year, the Times says.
What do you think? Should bankruptcy be restored as an option for those unable to repay their student loans -- either private loans or those guaranteed by the federal government? Should bankruptcy standards be relaxed to help the unfortunate?
Some don't think so, at least not for federal loans. Wrote one reader of the Times:
Many people are financially handicapped for life by no fault of their own. However, if you choose to take the risk inherent in taking out a loan, you do not fall within this group. You took a risk. You took someone else's money and agreed to pay it back with interest. Other taxpayers who did not take that money should not have to pay for you.
More on MSN Money:
- Grandma's new worry: Student debt
- Are universities unethical?
- 11 surprising student loan facts
- Student loans push up bankruptcies
- Student loans sink Mom and Dad
- Will I be able to pay back my student loans?
My husband and I will have paid back over 100k once we finally pay it back ( in 7 years). Our debt load is manageable, we just have to say no to a lot of things.
Just because my husband took the long way through college about 80k, does not make it necessary for the tax payers in America to pay for his Immaturity at the time.
If you can't pay it back- or wont pay it back. Don't go to school. People need to have some personal responsibility. There are too many cry babies. I can tell what 50% of my friends had helicopter moms as they grew up... They can't tie their shoes without asking a question. Parents need to educate and give tools to their youth and let them make some mistakes when they are younger than college age. It is not helping our lives or the future of America to have complacent idiots as the next generation. If you want to blame someone... take a look in the mirror. It isn't Obama or Romney. Wake up!
Please, there's an easier way to deal with this. If the person is living in poverty, or somewhere around the poverty line, then they can be forgiven their loan.
If they ever file a tax return that shows the have risen above the poverty level, a red flag goes up and they get a letter from the government saying the must resume paying their student loan. If they only remain above the poverty cut-off line for a while, they can prove to the government their new status and go back to being forgiven (this must be made a difficult process).
If you let all these people who cranked up these outrageous loan amounts get off scot free, it will just add to the nation's problems. You are aware of all the doctors and lawyers who will take time off (or work for free) until they get their loan forgiven, and then go back to work making big money. You know this will happen. That's why we need the tax return rule. If they star making enough to repay the loan, their status changes, and they become payers, not takers.
The rules are fixed for the poor. If this damn country is willing to give banks bailouts, then give a bailout for students you told would be better off if they got that bullsh!t piece of paper that sent them into slavery and has sent our nation into 1 trillion in debt.
You know what...those that disgree; stay on your high horse of moral ineptitude. When random shootings occur by people that feel spiritually bankrupted over the matter don't come knocking at my door for help or talking about a national tragedy. It all good when the human valuation of inequity is beset on the poor and unfortanate. However, there is a consequence for that.
Pay back the loans and man and women up about it.
No freebees for anyone. Stop the madness and the ObamaWorld tactics.
So its ok for 1%er Donald Trump to file bankruptcy a million times but you all are whinning about helping the under/non employed student with private student loans?!?!?!?!?!? And let's not forget that the underemployed graduate, that is barely getting by, is ALSO a TAXPAYER too.
NO student loans shouldn't be discharged. There should be limits on how much a person is allowed to borrow. The limit should be a limit on how much can be borrowed. Majoring in art history....limit is $1000. Mechanical Engineering.......$40,000 or less, because in my opinion a lot of things that students believe are necessities really aren't.
look, you can get a federal loan deferment if you're in a hardship situation.
the feds are paying interest on th loans for an indefinate time. i got a 1 year deferment on federal student loans i took out in 1991.
contact your loan servicer. it's easy to do.
whatever you do, don't let the interest build up month after month. that's a mistake i made way back when and i'm still paying for it.
Student loans should not be dischargeable. I borrowed money so I could go to college but I didn't go to the most expensive college I was accepted to. I went where I could receive a suitable education and where I could afford. I knew when I signed for the loans that I had to start paying them back 6 months after I graduated or left school for any reason. When I graduated, the monthly payment was higher than I could afford at the time so I extended the life of the loan by 5 years. Does it suck? Absolutely!! But guess what? I agreed to the terms when I signed the loan documents.
I'm so tired of reading about folks who borrow money and then moan and groan when they have to start paying it back. Deal with it!
"Repay" not "replay"
Also, I am hearing many new graduates are essentially banking on the government setting up a program to forgive student debt without adverse consequences for the borrower student so that in the meantime, they make minimal payments and hope the rest of the balance will be forgiven in a few years. Any new legislation passed must take into account that at least some people may be planning to have their loans forgiven (even if their circumstances are not "hopeless") and the impact it would have on the rest of the economy.
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