The problem: There is not enough money to go around. It is important to face reality when you consider your financial situation. If you cannot pay your bills on time, all of your bills, on the day they are due, then you have a problem. You can pretend the problem does not exist. You can ignore it, you can put it out of your mind, you can avoid opening the mail, you can employ a squeaky wheel solution [pay the creditor that screams the loudest]; but in the end, if you have not paid all of your bills your life remains in a debt grip that limits everything you do, everywhere you go.
Student loan debt is at record levels and has created a generation of high risk borrowers with low credit scores. The average student owes more student loan debt now, over $27,000, than any other time in history.
Deferment is not a solution. Neither is forbearance. Deferment and forbearance each makes the problem worse. Deferring payment on student loan debt pretends the problem does not exist. In reality, the debt remains unpaid and remains on your personal balance sheet as a debt you owe. But hidden in the deferment are tiny interest charges that accrue and eat away at whatever good endorphin high you enjoy from pretending you do not have to pay the student loan debt. Deferment defers the payment, it does not defer the interest charges from adding to your balance. Likewise, interest continues to add up on forbearance programs. Both deferment and forbearance programs delay payment but continue to add interest. These are seemingly solutions that actually cause more problems.
Take the example of a $30,000 student loan at 7% interest. The national interest rate for a student loan in 2013-2014 school year is going to be 6.8% based on current law. Using our round numbers, a one year deferment will add $2,100 to the debt after one year, or an extra $175 per month average. If you defer that payment for 5 years your student loan debt will increase $10,500.
Myth: “I cannot file bankruptcy on my student loan.” Any lawyer who practices consumer bankruptcy knows at least one client who said that. In fact, you must include your student loans when you file bankruptcy. The bankruptcy court is even required to collect data on the amount of student loan debt consumer bankruptcy debtors have and courts report that information to Congress each year. [28 USC 159].
Yes it is true that bankruptcy will rarely discharge student loan debt [11 USC 523], but bankruptcy can be a useful tool to pay student loans.
Student loan debt can be paid during bankruptcy. Most consumer bankruptcy cases fall into one of two categories, Chapter 7 cases and Chapter 13 cases. In a successful Chapter 7 bankruptcy certain debts are generally discharged in a matter of a few months. In a Chapter 13 case, a person can choose to repay certain debts over a period of time up to 5 years. In each type of bankruptcy, creditors are prevented from attempting to collect more money than the bankruptcy system allows.
By discharging, or wiping out, most other personal debt in a Chapter 7 bankruptcy, you can free up income to use to pay on your student loan. Money that you formerly paid toward credit card debt, medical debt, payday loans, old utility bills and other unsecured debt can now be paid to student loan debt instead. So instead of paying that squeaky wheel credit card bill collector that calls you everyday, you can discharge the credit card debt in bankruptcy and use that money to pay the student loan. Use bankruptcy to wipe out dischargeable debt and free up money to pay debt you cannot discharge in bankruptcy.
In Chapter 13, creditors share the proceeds of your payments based on the classification or group a debt belongs to. Student loan debt is classified as a general unsecured claim. For example, student loan debt normally receives the same share or percentage of payment that other general unsecured debt receives. There are exceptions, and some bankruptcy courts let you classify student loan debt separately so it can receive more money than other debt. All payments have the effect of reducing the overall student loan balance. It is important to make sure the student loan receives a substantial payment each month both to cover the accrued interest and to reduce a portion of the principal balance. Debtors in bankruptcy should consider adjusting the monthly household budget to make additional payments to the student loan debt as can be afforded.
Andy Miofsky, Esq.
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Last modified: March 20, 2013