Student Loans and Bankruptcy

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 and  there 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.

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE FOR BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN   MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. 

© 2011 Joan Grimes



Advice From People Who Filed Bankruptcy

 I have been asking people who come into my office if they have any advice/regrets about their actions prior to filing bankruptcy.  Here is their advice:

1. Seek Legal Counsel.  Don’t wait to find out your options.  Almost every person said they wish they had come in sooner.  Many have said they would have done things differently had they known the law and available options.

2. Don’t borrow or take money from your 401k, IRA, Savings Account, Children’s Saving Account, Deferred Compensation to cure to the default.  So many people regret borrowing or taking a distribution from their retirement plan.  Unfortunately, many people don’t know that this money, if borrowed, must be repaid in full or it will be considered income and taxed accordingly.  In addition, this tax cannot be discharge in bankruptcy.  It is heart breaking to see people take money out of their retirement to stay current on the mortgage, to only lose the house at the later time, but are still responsible for tax liability of the distribution.  

3. Don’t borrow money from family or friends to stay current on mortgage or other bills.    Family and friends want/expect to be repaid irrespective of whether you file bankruptcy.   In the eyes of the bankruptcy code, your family and friends are just another lender and will not receive preferential treatment.  

4. Don’t juggle credit cards to pay mortgage.  Cash advances and balance transfers may cause problems in a bankruptcy.  In addition, depending on the type of real estate debt you have, a short sale or foreclosure may be possible without a bankruptcy.  However, if you run up your credit cards trying to keep the house, a bankruptcy may be evitable.

5.  Don’t leave house until property forecloses or short sale is complete.  Almost every person that has left their home prior to the foreclosure or short sale being completed regrets the decision.  Once you stop paying on the mortgage, your rent is “free” with the exception of paying the Homeowners Dues and keeping insurance on the property.  Further, since you are still responsible for the maintenance  of the property until the foreclosure or short sale, you might as well enjoy it and save some money.  No reason to pay rent any soon than necessary.

6.  Don’t let your cultural pride stand in the way of you making sound financial decisions.  There is nothing to be ashamed of.  You did not make this economic meltdown.  You are not responsible for the economic collapse facing the Bay Area.  The economy of your parents’ generation is not the same as today.   

7.  Don’t co-sign for anyone.  No one can promise the future.  So many clients regret co-signing for a friend or relative. Co-signing for cars, furniture, Time-Shares and homes seemed like a good idea, but times change and suddenly there is a default.  Worst of all, don’t co-sign on Student Loans.  The default  rate by students who have had a friend or family member co-sign is much higher and YOU CANNOT DISCHARGE CO-SIGNED STUDENT LOANS IN BANKRUPTCY!

If you do not have sufficient income to pay your bills as they come due and owing, you should seek legal counsel before withdrawing any monies from a retirement account, savings account or taking a loan against your home or car.  These are difficult times, but do not miss the help and protection provided by the Bankruptcy Code and California law by waiting too long.  Just because this ship is underwater does not mean that you should give up your life vests that you will need to keep you afloat!

Want to learn more, listen to Joan Grimes recent interview on the Bay Area Real Estate show on FOX NEWSRADIO 910 AM with Krista Mashore.  Joan reveals some of the regrets she hears from clients filing bankruptcy. 

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.              

© 2011 Joan Grimes