Other Ways to Use Bankruptcy for Student Loan Debt
If you think of bankruptcy only as a tool to discharge debt, then you don’t understand the full power of the bankruptcy laws.
Bankruptcy’s primary goal is one of equity – a legally-mandated way of balancing the scales in an inherently unfair system. People who owe money are looking for help, whereas companies that lend money are looking for immediate payment in full. The bankruptcy laws are an attempt to give both sides a little of what they need while not taking advantage of one another.
I’m not saying it’s a perfect system; in fact, there’s a lot wrong with the bankruptcy law as it applies to helping individuals and families. But within that imperfection you can find opportunities for creating a better and more stable financial future – even if it doesn’t result in discharging your student loans.
Challenge the Validity of Student Loans in Bankruptcy
In Chapter 13 bankruptcy, a person files a plan to repay a portion of their debts over a period of 3-5 years. The bankruptcy court appoints a trustee to collect those payments and distribute funds to the creditors once the judge approves the terms of the plan.
In order to receive payment from the trustee, a creditor needs to file a document called a Proof of Claim. That Proof of Claim needs to include certain information related to the debt, and a failure to provide all of the information may lead the judge to deny the right to receive payment.
For student loan borrowers, the Proof of Claim provides insights to the debt that may not otherwise be available. The creditor can be forced to provide a copy of the Promissory Note, payment history and proof of any transfers of the debt from one entity to another. If a student loan lender doesn’t have the proof needed to substantiate the claim for payment, it is within the court’s power to rule that the lender has no right to collect the debt.
In this way, the Proof of Claim allows the student loan borrower to turn the tables on the lender. Rather than waiting to defend a student loan lawsuit in the hopes of obtaining relief or a settlement, the borrower can force the student loan company into bankruptcy court.
Cure a Defaulted Private Student Loan
The bankruptcy law allows a person to cure a default on any loan so long as the final loan payment is due after the end of a Chapter 13 Plan. Though this provision of the law is usually used to catch up on mortgage or vehicle loan arrears, in some situations it may also work for people who have a defaulted student loan.
There are limitations to how and when someone can use this provision, called cure and maintain. In fact, many courts have held that the student loan lender can’t receive a greater percentage of the overall debt than other creditors. For that reason, it may make sense to consider the option of filing a Chapter 7 bankruptcy to discharge other debts before going into Chapter 13 to deal with the defaulted student loan.
Regardless, the ability to cure a defaulted student loan presents an option that you shouldn’t overlook.
Make Student Loan Payments More Affordable
Bankruptcy may provide a way to reduce your other monthly debts so you can afford the student loan payments. Once you complete your bankruptcy case, you may find it easier to make your student loan payments. Those payments will reflect as a positive post-bankruptcy credit history, increasing your credit score in a shorter time than might otherwise be the case.
You may also use bankruptcy as a tool to force student loan lenders to accept lower payments for a period of time. This gives you a chance to stop collection activities, wage garnishments and other enforcement actions while you work on stabilizing your household finances.
Neither of these are perfect solution to your student loan problem because you will remain responsible for the student loan after the case is over, and interest continues to accrue on the unpaid balance. But sometimes it’s better to get some relief rather than continuing to sink under the weight of overwhelming student loan debt.
Take the Time to Map Out the Right Plan
Remember that bankruptcy is a tool – and, as with any tool, it can be useful in specific situations but not others.
It’s important to review your total financial situation with a student loan lawyer that has extensive experience in bankruptcy as well as non-bankruptcy options. Without a complete analysis and an understanding of the impact of each option available to you, you may end up missing the solution that’s the best fit for your needs.
It’s worth your time to be Money Wise on this subject. Your financial future depends on it.