Soaring college costs have led millions of students across the United States to take out large loans to finance their educations. According to the College Board, the price of attending a public four-year college has risen 27% beyond inflation over the past five years. To further break it down, costs have gone up 24% at community colleges and 13% at private universities.
According to USA Today, student borrowing topped $100 billion four years ago for the first time, and, the following year, outstanding student loans exceeded $1 trillion for the first time and have remained at that astronomical level. Between 2004 and 2012, aggregate student loan balances almost tripled due to an increasing number of borrowers and higher balances per borrower. Sadly, almost 17% of borrowers are delinquent on student loan payments, according to the Federal Reserve Bank of New York.
While many college students successfully procure good-paying jobs after graduation and start paying off those student loans, others are unable to do so. While the economy has recovered some since the recession of 2008 and 2009, unemployment or underemployment is still a big problem. Weak job markets and stagnant incomes weight heavily on graduates. Often, student load debt is piled onto mortgage, credit card, medical or other debt. In some cases, the only way out from underneath that mountain of debt is to declare bankruptcy.
Individuals can file for bankruptcy under two chapters of the Bankruptcy Code. Chapter 7 is known as liquidation and involves the sale of all assets to help repay money owed to creditors. Chapter 13 is known as reorganization and involves creating a plan to repay creditors.
While declaring bankruptcy can help wipe the slate clean for many debtors, student load debt is different. The Bankruptcy Code lumps student loan debt with other types of debt that can't be discharged such as child support and criminal fines.
Up until 1976, all education loans could be discharged through bankruptcy. That year the Bankruptcy Code was changed, which disallowed college loans to be discharged during the first five years of repayment. After five years of repayment, the loans could be discharged through bankruptcy or if "undue hardship" was being experienced by the borrower.
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which gave further protections to federal and private student loans from bankruptcy protection. However, if the borrower could demonstrate to the court that repayment of the student loan would cause an "undue hardship," the court could rule the need for bankruptcy protection justified and allowable.
The court uses a three-part test to determine hardship:
• It would be a hardship if you are forced to repay the loan but unable to maintain a minimal standard of living for yourself and your dependents.
• There is evidence that this hardship will continue for a significant portion of the loan repayment period.
• You made good-faith efforts to repay the load before filing for bankruptcy. This usually means you have been repaying it for a minimum of five years.
While you are in bankruptcy, you're protected from collection activities on your student loans. However, during the bankruptcy process, your loans will continue to accrue interest, which will increase your loan balance if no payments are made.
Bankruptcy is a highly complicated and lengthy process. To help from feeling completely overwhelmed, it's wise to seek the services of an experienced bankruptcy attorney who can advise you of all of your options.
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