Student Loans and Income Contingent Repayment Plans

05 Aug Student Loans and Income Contingent Repayment Plans

One way to deal with unaffordable student loan payments is an Income Contingent Repayment Plan (ICP), where the monthly payment will vary with your income, as low as zero, and the unpaid balance will be forgiven at age 65. You will have accruing interest and the public reporting of the debt, and you may have to pay income taxes on the forgiven amount. You cannot have an ICP if your loan is already in default, although your bankruptcy attorney may successfully negotiate this.

Bankruptcy law allows your attorney to argue that the student loan payments prevent you from maintaining a minimal living standard. This is called an “undue hardship,” and is a very strict standard. A judge may require no home ownership, for example, depending on your circumstances.

After filing papers making the undue hardship argument, your attorney might succeed in negotiating for an ICP despite the existing default, especially if the lender is afraid of the entire loan being discharged instead. It is also conceivable to negotiate so that the debt is not publicly reported and the amount forgiven at age 65 be treated as discharged in bankruptcy instead of possible taxable debt-forgiveness income.

Expect to pay significant, additional attorney fees for filing the papers making the undue hardship argument despite not knowing the outcome of negotiations. Your attorney has to plan on full trial preparation and attendance if negotiations are not successful, since the judge may not permit dismissal.

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L. Jed Berliner practices exclusively in consumer bankruptcy, foreclosure defense, and related consumer protection litigation such as credit card defenses and suing debt collectors. He established his Springfield, MA practice in 1988. Attorney Berliner is a regular and active contributor to the Bankruptcy Law Network, the Bankruptcy Roundtable, and the National Association of Consumer Bankruptcy Attorneys, three specialized consumer bankruptcy forums on the Internet, and is an informal mentor to regional practitioners. He is recognized by his peers as an expert in consumer bankruptcy issues. He thoroughly enjoys being rated "excellent" in his client surveys.

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