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Q&A: High Student loans and Bankruptcy

Ms. R from the Buffalo area wrote to me and asked what advise I could give her concerning her $100,000 + student loan debt.  Payments are increasing by 1/3 and she can hardly afford the current payment.  If you have a better answer than me, please post a comment.  My response:

Your question is one I hear far too often: people burdened with huge student loan debts. I firmly believe that some students graduating from college today will be paying student loans out of their social security benefits forty years later.

Unfortunately, as a bankruptcy attorney, I am not sure I can offer you much help, beyond a short-term (5 year) lowering of your monthly payment. Student loans are not discharged in bankruptcy, except in cases of a "hardship discharge", and the standard for a hardship discharge is extremely high - basically permanent disability or something along those lines.

If you filed a chapter 13 bankruptcy, and assuming there are not any other complications in your case, you could pay into the chapter 13 plan whatever income you had left after paying necessary household bills. The student loan payment would receive its share of this plan payment, but to the extent that the student loan bank would not be receiving as much as they are owed under your loan contract you could end up owing even more on the loan five years from now compared to today.

Here's an example: say you owe $100,000 in student loans at 6% interest. the student loan bank would have to receive at least $500 p/m just to cover the interest on the account.

Now let us say that after paying all household expenses (not including the student loan payment and payments on credit cards) you had $600 per month left over. Let's say you filed a chapter 13 plan that called for paying unsecured creditors $600 p/m for five years. Let's further say that you owed $50,000 on credit cards besides the $100,000 you owe on the student loans. 2/3 of the $600 you would be paying each month in Chapter 13 would go to student loans, because they would be 2/3 of your unsecured debts. So the student loans would, in that example, receive less than the $500 p/m of interest running on the account. After five years, you would owe more on the account then than you owe now.

3 Comments

The only solution is emigration. Our ancestors came here because America was the land of opportunity. "The streets were paved with gold." It has now become something else. I don't know whether US judgments can be enforced in Canada or Australia, but young people overwhelmed by student debt should look into that option.

That's what I am planning to do. I'm leaving America, because trying to pay back $200k+ in student loan debt, isn't possible in this economy. I'm going to renounce my US citizenship and search for work in foreign lands. That way, I won't have to come up with $2500+/month for student loan debt. Private loans are at 6.75% but default (i.e., late payments) and it jumps up to 11.25%. So, I'm screwed.

Hmmm. . . interest alternative. I have written a new blog today (August 5, 2011 in Bankruptcy Q & A topics) reviewing the legal background that might assist in choosing this rather extraordinary plan of action.

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Peter R. Scribner, Esq | 1110 Park Avenue | Rochester, New York 14610
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