Lets face it. There is a big student loan problem in this country. So many of our students take out huge amounts of loans in order to afford the exorbitant cost of higher education. Then, when 2008, rolled around more and more students were not able to find jobs as they had expected when they took out the loans. Now many, many students have been forced to take jobs making far less than they anticipated in order to make ends meet. Often, the job that 20-something has does not leave any extra to pay on a student loan. Often the graduate delays the problem by deferring the student loan, thinking that by the time the deferral period is over that he or she will have better income and will be able to make the required loan payment.
I am sure a good number of those recent college graduates do go on to find a better job or are able to increase their incomes so that they are able to make their student loan payment. However, there are also many other recent graduates who find themselves in a position where their loan has come due and they are receiving collection calls and threats of default.
If you are searching the internet right now attempting to find the solution to your student loans I imagine you have already come to the conclusion that student loans are not typically dischargeable in either a Chapter 7 or Chapter 13 bankruptcy. Further, Chapter 7 bankruptcy does little to keep student loan creditors off of your back because the entire process only takes about 5-6 months. However, in limited circumstances Chapter 13 bankruptcy may be helpful to those whose financial problems are caused mostly by unaffordable student loan payment.
The reason Chapter 13 bankruptcy may prove to be more helpful than Chapter 7 with student loans is that a Chapter 13 bankruptcy takes as long as 60 months. A Chapter 13 bankruptcy will only work for an individual or couple who has some money left over at the end of the month after paying their living expenses such as rent/mortgage, food, clothing, heat, gas, car payment, etc. Neither student loans nor credit cards should be added into expenses when determining whether there is any money at the end of the month.
If an individual or couple has funds left at the end of the month, but not enough to pay a the student loan payment, and has minimal or no other unsecured debt, filing of a Chapter 13 may make sense…..and here’s why. In a Chapter 13 bankruptcy an individual or couple makes a payment in the amount of their disposable income for up to 60 months to a trustee who pays out the funds according to a repayment plan the bankruptcy attorney files with the Court.
Lets assume that a 27 year old, “Fred,” has $75,000.00 of credit card debt and $5,000.00 on a credit card. That is his only debt. His student loan requires a payment of $500.00 per month. However, after Fred pays his living expenses he only has $300.00 left to pay on both his student loan and the credit card. Until now, Fred has deferred the student loans, but now his student loan company wants to get paid. If Fred files a Chapter 13 bankruptcy petition in the Souther District of Indianapolis, he will likely be responsible for paying $300.00 per month to the Chapter 13 trustee over a period of 60 months. The filing of his bankruptcy petition will stop his credit card and student loan from contacting him. The $18,000.00 that Fred pays in over the next 5 years will both eliminate his credit card debt and pay down on his student loan. Here’s how it would break down.
Fred Pays: $18,000.00
less approximate attorney fees paid through the repayment plan: $3,500.00
less approximate trustee fees paid through the repayment plan:$1,440.00
Therefore, approximately $13,060.00 is left to pay his unsecured creditors on a pro-rata basis. Since Fred’s credit card debt accounts for about 6% of his total debt his credit card company would receive a total of about $784.00 of the funds he paid while the student loan company would receive about $12,276.00.
In this scenario a Chapter 13 bankruptcy would allow Fred to pay what he could afford on his debts while still making some progress on his student loan. Further, it buys Fred 5 years to get a higher-paying job so that when his Chapter 13 bankruptcy is complete that he will be in a position to pay his student loan.
As with anything, filing Chapter 13 bankruptcy to manage student loan payments is a better idea for some than others. The more unsecured debt you have, the less that will go toward payment on your student loan. Further, some college grads are in a position where they can’t even meet their minimal living expenses and have nothing left over to pay student loans. Chapter 13 bankruptcy is not the solution for everyone.
Since each case is different I take the time to sit down with each potential client and go over their individual situation. Halcomb Singler offers a free initial bankruptcy case evaluation for those who live in the Indianapolis area at our Carmel, Indiana office. We will answer your questions and let you know whether or not we think bankruptcy might help. If bankruptcy is not right for you we may be able to assist you in settling your debts outside of bankruptcy. For the free case evaluation please call our office at (317) 575-8222 or click here.
Halcomb Singler, LLP, is a debt relief agency. It helps people file for bankruptcy under the bankruptcy code. No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so. The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses