If you read the law, it says we can get rid of the student loans in bankruptcy if we can show “undue hardship.”
“Undue hardship” doesn’t sound so bad. But it is. What bankruptcy judges take that to mean is there is absolutely no hope that you will ever make enough money to pay anything toward the student loans. As long as you are young and in good health, you can’t prove undue hardship. Meaning you can’t get rid of student loans.
My recommendation, which I don’t like, is to put people into a Chapter 13 payment plan where you make a small to the bankruptcy court for five years. The court sends that payment to the student loans. At the end of the five years the student loans are still there–bigger than ever–and you do it again. Maybe do that three or four or five times until we can get to the point where we can tell the judge there’s no hope of you making enough to pay much of anything and you have been paying under court supervision for fifteen or twenty years. At that point you should win, although plan B is another five year Chapter 13.
Have I said I don’t like this? I don’t like it. But especially for people with large “private” student loans, it can be your only hope of having a normal life. (I like this a lot better for a married couple where only one has the student loan, so the other can do things like finance a car.)
Before October 2005, the only government guaranteed and charitable student loans survived a bankruptcy. Private student loans were like any other debt. I can see no good reason why Congress changed the law, but I do see a political reason: Rep. John Boehner, Republican Leader in the House of Representatives, always raises a lot of money from the student loan lenders–and passes it around to other Republicans.
These private student loans have a much higher interest rate than the government guaranteed student loans; and they do not offer the flexible payment plans that the government guaranteed loans do. If you get behind with them, they can wreck your life. Thanks, Congressman Boehner.
PS Michelle Singletary, consumer finance advisor, had a good article about this problem in the April 20, 2010 Washington Post. She didn’t have any solution though that’s any better than mine.
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Update on this student loan blog. I saw good news in the American Bankruptcy Institute daily post of April 22, 2010.
Congress is considering undoing the damage done by Congressman Boehner and allow PRIVATE student loans to be discharged like any other private loan in bankruptcy. Favorable action would be a nice surprise. Here’s what the ABI reported.
“The House Judiciary Subcommittee on Commercial and Administrative Law today weighed a bill to amend the Bankruptcy Code to allow private student loans to be discharged. Witnesses at the hearing on H.R. 5043, http://www.abiworld.org/e-news/HR5043.pdf the “Private Student Loan Bankruptcy Fairness Act of 2010,” included Deanne Loonin of the National Consumer Law Center, John A. Hupalo of the investment firm Samuel A. Ramirez & Co., Inc., consumer Valisha Cooks and Adrian M. Lapas representing the National Association of Consumer Bankruptcy Attorneys. “
Update: Now that Congressman Boehner is Speaker of the House, the chances for reform on these private student loans is not very good.
Here’s an update from the Wall Street Journal. Student loans are the only form of consumer lending that has increased since the recession began. And student loan default rates are also way up. http://blogs.wsj.com/economics/2011/08/16/more-student-loans-are-past-due/tab/print/.
I still don’t like the solution I have here. But I think more and more people will need it.
I saw today that Americans owe more on student loans total than on credit cards. That took me by surprise.
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