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Bankruptcy Isn't A Solution For Student Loans

Jun 10, 2008
Whenever a person considers filing for personal bankruptcy and student loans make up a good part of their debt, there is a good chance the loans will not be discharged. In 1998, when the governments rules regarding bankruptcy were changed, student loans were ruled to be non-dischargeable as many financial institutions were losing million of dollars.

The reason being that many financial institutions were losing millions of dollars and the government was losing millions as well because the federal government guaranteed many of these student loans.

With the rules of bankruptcy today, a person filing Chapter 7 bankruptcy must prove that they will have undue financial hardship if the student loans are not discharged. In most cases if student loans make up a large portion of the individuals debt, a portion of the loan may be discharged by the judge but not the entire amount.

If the student loans have been sold repeatedly to other lenders with varied interest rates, the exact balance may be hard to determine. In cases such as this, some or all of the entire balance may be discharged.

The provisions of Chapter 13 bankruptcy are different for student loans. An individual filing can have all of their secured and unsecured debt become part of a repayment plan through a court trustee. If student loans are in the mix, then the individual must show they have enough income to make the monthly payments to pay off the student loan debt within five years.

Determining if Debtor Can Pay

In order to file Chapter 13 bankruptcy, an individual needs to prove that they can repay the debt. For instance, if their total debt is $100,000, the trustee divides that total by 60 months and comes up with a monthly payment of $1.667 a month. The individual must show that they can pay this monthly payment and have enough left over for living expenses. If they are able to meet this criterion then they may be able to file Chapter 13 bankruptcy and include their student loans in the deal.

If their income is not sufficient to cover the monthly payment plus living expenses then filing Chapter 13 bankruptcy is not an option for them. The only alternative is to file Chapter 13 bankruptcy on their other debts, which may free up money for them to pay their student loans.

Making the monthly-required Chapter 13 bankruptcy payment in addition to student loan payments may be a struggle for some. One option is to secure a loan with lower interest rates and lower payments to pay off their student loan debt.
About the Author
Debt consolidation isn't the only way to get out of debt. Another effective system for paying off debt is to snowball credit bills. Learn how the snowball method works on the Debtopedia website at http://www.debtopedia.com
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