Wednesday, January 25, 2017

Strategies for student loans in bankruptcy

Here at Shenwick & Associates, it is our experience that student loan debt is the fastest growing debt many people are burdened with. As of September 2016, outstanding student loan balances were $1.279 trillion and counting. This month, we're going to take another look at student loan debt, its dischargeability in bankruptcy and other potential tactics debtors can use to cope with it. Earlier this month, the New York Times reported on an effort by former students of ITT Tech to intervene in its bankruptcy to be recognized as creditors and to resolve their claims against ITT Tech for loan cancellation.

As many of our readers are aware, defaulted student loans are generally not dischargeable in bankruptcy except in special circumstances. The debtor must show that: (1) he or she cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off the student loan; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loan; and (3) that the he or she has made good faith efforts to repay the loans. That was the holding in Brunner v. New York State Higher Education Services Corp., 831 F.2d. 395 (2nd Cir. 1987), the leading case on student loans and bankruptcy, and its reasoning has been adopted by most federal appellate courts.

However, non-bankruptcy remedies are available under federal and state law for student loan debtors, including loan consolidation, deferment, forbearance or a workout. These solutions may be better for many student loan debtors than bankruptcy.

  1. Loan consolidation. Most federal student loans (except private loans) are eligible to be consolidated. However, if your loans are in default, you must meet certain requirements before you can consolidate your loans. Loan consolidation greatly simplify loan repayment by centralizing your loans to one bill and can lower monthly payments by giving you up to 30 years to repay your loans. You might also have access to alternative repayment plans you would not have had before, and you'll be able to switch your variable interest rate loans to a fixed interest rate.

  1. Deferment. Deferment is a period during which repayment of the principal balance of your loan is temporarily delayed. Also, depending on the type of loan you have, the federal government may pay the interest on your loan during a period of deferment. The government does not pay the interest on your unsubsidized loans (or on any PLUS loans).

  1. Forbearance. If you can't make your scheduled loan payments, but don't qualify for a deferment, your loan servicer may be able to grant you a forbearance. With forbearance, you may be able to stop making payments or reduce your monthly payment for up to 12 months. Interest will continue to accrue on your subsidized and unsubsidized loans (including all PLUS loans).

  1. Workout. With the encouragement of federal banking regulatory agencies, some financial institutions that make private student loans offer workouts and loan modification programs. Your lender or servicer should be able to tell you the options available, general eligibility criteria and the process for requesting a workout or modification.

For more information about possible solutions to coping with your student loan debts, please contact Jim Shenwick