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A Chapter 13 Bankruptcy Can Help You With Your Large Student Loan Debt

Student loan debt is on the rise, much like the mortgage mess we are still dealing with as a nation.  In fact, student loan debt appears to have doubled since 2007, to an estimated 1.1 trillion dollars!  Twenty percent of families are presently burdened by a student loan, with an average balance owed of $26,682. Many owe far more.   This includes loans from such government lenders as famed Sallie Mae.

Some are just out of school and facing difficulty finding work, and remaining current with their large monthly student loan payments.  Others are faced with “negative equity” meaning instead of getting out of school and starting at “zero”, they owe far more than they are worth, sometimes by tens of thousands of dollars.  Prior to 1998, an individual those student loans were more than seven years old had the option of filing a Chapter 7 bankruptcy and discharging their entire student loan  balance.

Unfortunately, the law changed under President Clinton.   So, while a Chapter 7  bankruptcy  used to be a viable option for those individuals burdened with large student loan balances, bankruptcy law after 1998 no longer allows an individual to discharge his or her student loan debt by using a Chapter 7.   Instead, the only way to completely discharge student loan debt today is via a mechanism called a “hardship discharge”, which is almost impossible to qualify for.

The result is that, people young and old are now turning to a Chapter 13 to manage their large student loan debt and monthly payments.   Here, a client may have a student loan debt that mandates a monthly payment of $800/month or even $1500/month, based on the balance owed to the lender(s).  If the person cannot afford to tender such a large payment, then they are hit with large penalties in addition to monthly interest charges.  Over the years, these fees and costs only serve to add insult to injury.

However, if the person can only afford to pay $200/month, that is all he or she would need to pay in a Chapter 13 bankruptcy.   And the best part is that the lenders can no longer charge you any penalties, nor can they force you to pay the higher monthly payment they can charge you outside of Chapter 13.  This can add up to huge savings over the years.

It basically appears like student loans are fast becoming the next “ticking time bomb”, similar to the mortgage debt problem which eventually led to the collapse of many large lending institutions, and paved the path for what has come to be called the “great recession”.  As a result, many individual home owners lost their homes and the hard earned money they invested in their homes.    The mortgage mess also resulted in many bankruptcy matters, especially Chapter 13 cases, as home owners used the bankruptcy court as a mechanism to save their homes from foreclosure and to eliminate any excess debt.

It now appears that the future may cause those individuals faced with large and difficult to pay student loans to similarly use a Chapter 13 bankruptcy as a tool for bringing their student loan debt under control, as well as to obtain a monthly payment which they can afford to pay each and every month.

Additional Resources:

Student Loan Debt Horror Stories, Revealed, by Jim Lardner, U.S. News, May 14, 2013