Tag Archives: student loans

I can’t pay my student loan debt. Can bankruptcy help?

 

According to a recent article in US Today, student loans will exceed $1 trillion this year. Unlike most other unsecured debts, student loans have a special status in bankruptcy in that it cannot be discharged (forgiven) through bankruptcy.

I meet with a lot of clients who have a ton of student loans and struggling to make the monthly payments. So, what can be done with student loans? Here are a few options to consider.

1. Go back to school

I know this may sound counterintuitive. After all, the last thing you probably want to do is go back to school after having just graduated. But, by going back to school, you may be able to put your student loans into deferment. Generally, you must take 6 or more credits. Community colleges are very inexpensive and you can take 1 credit for around $40. For example, San Mateo Community College will run you $354 for 6 credits including fees and parking.

Be sure to check with your student loan on this. Some private loans cannot be deferred even if you return to school.

2. Contact student loan for different repayment option

This one is obvious but worth mentioning. Most student loans have various repayment options designed to fit your income. Call your student loan company and ask.

3. File Chapter 13

While bankruptcy can’t get rid of your student loan debt, Chapter 13 can keep the student loan company at bay for 5 years at a time. This is how it works. Once your Chapter 13 is filed, an Automatic Stay goes into effect, which prohibits further collection activities - including student loan debt.

In Chapter 13, your monthly payment is determined by your “disposable income” which is calculated by taking your income minus your expenses. This is the amount you are required to pay on a monthly basis in Chapter 13. So, by filing Chapter 13, you can keep the payments at a level you can afford.

Here’s the catch though. This may actually lead to an increase in the amount you owe because if you pay less than the actual monthly minimum payments, the difference will be recapitalized.

The idea is that at the end of the 5 year period, you’ll be in a better financial position to be able to repay the student loan. Chapter 13 is also ideal if you have other debts such as credit cards and personal loan, which will be discharged at the end of Chapter 13.

None of these solutions are perfect but there are options out there for dealing with student loan debt.

 

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Political Hostage

“Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.” Oscar Ameringer

Bankruptcy is a political creature in its origin. The right to create bankruptcy laws is written in the United States Constitution. Congress over time has made use of this right, and enacted bankruptcy laws known as statutes that govern bankruptcy rules and procedures. The last big overhaul was in 2005, known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The banking and creditor industry lobbied for years to pass this legislation. And several years after its passage, most people are still looking for the “Consumer Protection” part of the statute.

Since bankruptcy laws are borne in our political sausage making machine, the laws’ creation and changes are dependent on the mood of the country, the strength of the lobbyists, who’s in Congress and who’s the president, among a myriad of other factors. For as long as I can recall, every year it seems it is declared that politics is getting worse. I don’t know if this actually true, or if it just feels like it.

But I do sense a lot of desperation and rage. The Tea Party coalesced around a message against a big government that helped create a massive debt problem. Occupy Wall Street seems to be gaining traction with a message about the majority feeling disenfranchised by an increasing wealth gap created and sustained in part by a corrupt corporate/capitalist relationship. Someone sent me this Venn diagram about the two movements:

The point is that whatever the underlying belief is about the current cause of our problems as a nation, a lot of people are tired and angry. This feels like a recipe for change. Whether it’s a good recipe, that remains to be seen.

A lot of people need help. And bankruptcy is one way to help people in financial distress. My hope is that this turmoil creates the political will and landscape to rectify some of the mistakes in the bankruptcy code. Two examples:

  • Debt Limits in Chapter 13. Congress set the maximum amount of debt that a person can have in Chapter 13; you can have $360,475 in unsecured debt, and $1,081,400 in secured debt. These limits apply across the nation. This makes no sense as a national number. Don’t you think the mortgages in the Bay Area might be a little different than Mississippi? If you have mortgages or liens that exceed this number, you’re looking at Chapter 7 or 11 only. A lot of people that should be in Chapter 13 are left out by this senseless restriction. The irony is that many of the changes brought by BAPCPA were intended to funnel more people from 7 into 13. Well done, Congress, well done.
  • Student Loans. These are not usually dischargeable in any chapter of bankruptcy. Congress decided certain things were important and as a policy not dischargeable, such as child support and alimony. Okay, fine. But alimony and child support were given a special status. In Chapter 13 creditors are assigned priorities on how they are repaid. For example, child support arrears are a high priority debt, and your typical credit cards are low priority. This means that if you file a Chapter 13 and repay some of your debt, the money would first go to the child support arrears before the credit cards ever see a dime, if they see any money at all. Congress decided child support is both nondischargeable, and should be given a higher priority so that it is paid off.

Student loans are also nondischargeable, but were not given an explicit high priority status. They are treated like a last in line creditor. This means that at the end of a Chapter 13, depending on the arrangement of your debts, you may actually owe more to your student than when you started because they never received any of the money as a low priority creditor, so interest and penalties continued to accrue. This is one of the worst rules I keep running into. It only gets worse as student loan debts have swelled to record highs.

Is the current national mood willing and able to foster changes to the bankruptcy code? I hope so. I don’t believe in writing a bankruptcy code that is so loose that people “get away” with misdeeds through bankruptcy. But I also believe in fairness and correcting poorly or unfairly drafted legislation. The current code is riddled with errors that need legislative attention, particularly now as more and more of our clients hang on the downward sliding precipice of middle class status.

Images courtesy of James Sinclair and Schteeve2010.

A Case Against Borrowed Education

I am a huge fan of education and there is little doubt that on average, people with college education earn more than high school graduates. However, I am not a fan of student loans. Especially those that require parents to either borrow the money or co-sign.

When I was 17, starting college, I don’t think I gave much consideration about how much I would earn with a certain degree or what it would take to repay student loans. It was just about getting to live on my own, away from home and well, you know, enjoying college.

Personally, I believe there is a complete lack of education about money in general, and debt in particular - especially for college students. No one ever sits down with the college freshman and explains the fact that you will need to earn a minimum of $x dollars per year to repay $x of student loans. Nor is there a discussion about how much you’ll most likely earn with your degree.

For example, if you borrow $150,000 at 8% (not an unusual interest rate for private loans), repaid over 25 years, the monthly minimum is $1160. That amount is post-tax earnings, meaning you will need to earn just about double at $2,320 per month.

To think about it another way, let’s assume you get a job earning $50,000 per year. After various taxes, insurance, etc. at 40%, let’s assume you net $30,000. Of the net amount, you’ve already committed 46% to student loans, leaving only $16,000 to paying for food, gas, housing, entertainment, etc. Unless you’re living with your parents (which defeats the whole purpose of going away to college), $16,00 won’t be enough to live on.

I am seeing more and more recent college graduates who are in this exact predicament with very few options. Worse yet, there are many parents who co-signed for their children’s college education who are struggling to pay not only their own bills but racing against the clock to save enough for their retirement and having to repay their children’s student loans.

As the saying goes “buyer beware.”

Photo credit: http://www.flickr.com/photos/canvy/