If you are thinking about filing bankruptcy, but are worried about your ability to get student loans either for yourself or a dependent in the future, you are not alone. If you are worried about repaying student loan debt, you are not alone. These concerns are so common that the Bankruptcy Code specifically addresses them.
Let’s address the easy issue first: Getting student grants and loans after a bankruptcy. The Bankruptcy Code provides that no governmental unit may deny a student grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor in a bankruptcy case. What this means is that student grants and loans are available to people filing bankruptcy as long as you meet other grant or loan program qualifications. You should expect a credit report to be run when obtaining a student loan or grant. Therefore, it is a good idea to minimize other debt.
Now for the more difficult problem: Repaying student loans. The current Bankruptcy Code provides that student loans or obligations to repay funds received as an educational benefit, scholarship or stipend are not dischargeable in bankruptcy unless it would impose an undue hardship on the debtor. What this means is that 1) the debtor must show an inability to maintain a minimal standard of living based on current income and expenses, 2) that the existence of these additional circumstances is likely to persist for a significant portion of the repayment period, and 3) that the debtor has shown a good faith effort to repay the debt. These conditions are extremely difficult prove andthere is a recent bankruptcy case in San Francisco where the bankruptcy judge held that a “minimal standard of living” does not mean a middle class lifestyle and the debtor can be required to make “major personal and financial sacrifices.”
The good news is that on March 30, 2010, Congress enacted legislation to revamp the federal student loan program. The new law eliminates fees paid to private banks and will expand the Pell Grant Program. In addition, starting July 2014, the program will allow students to cap repayment at 10% of income above a basic living allowance. In the meantime, if you have student loan debt which you cannot repay, I suggest you contact your lender and enroll in the Income Based Repayment Program (IBR). This program is designed to help people pay back their loans at a rate proportional to their income.
The student loan debt crisis WILL be the next big crisis after we finish with the mortgage crisis. There is more student loan debt in this country than credit card debt. I fully expect some type of relief to be provided for student loan debt again under the Bankruptcy Code. It is just going to take time. However, I expect the relief provided will be dependent on a person showing evidence that some payment has been made on the debt.
In conclusion, student loan debt should be avoided, unless it is absolutely clear that a future career will be sufficient enough to pay back the debt. I strongly encourage you to minimize student loan debt for undergraduate school. Live at home, get a part time job. Don’t sell out your future and the future of your children. If you have other debt which can be discharged in bankruptcy, seek legal counsel. Discharging other debt and focusing on the repayment of student loan debt will make it easier for you. I see people every day for a FREE 30 minute consultation in my offices located in Walnut Creek, Antioch and Brentwood.