Tag Archives: student loans

What Happens to Student Loans in Bankruptcy?

Graduate - Gril holding signIn most instances, the obligation remains to repay student loans despite filing Chapter 7 or Chapter 13 bankruptcy.

During a bankruptcy case, the debtor is exempt from collection on the student loan, this is called an Automatic Stay. The automatic stay immediately goes into effect upon the filing of the bankruptcy petition and prevents collectors from taking any action against the debtor to collect.

Interest continues to build, even during a pending bankruptcy. As a result, the ultimate balance for a student loan is higher with additional interest.  In some situations, the interest on the loan may be excused.  The type of bankruptcy filed combined with other factors determine whether interest is forgiven. Chapter 7 and Chapter 13 bankruptcies treat student loans differently.

In a Chapter 7 bankruptcy, a debtor’s assets are sold, and debts are paid from sales proceeds in accordance with a priority system of seniority. The priority scheme is set in the bankruptcy code and based upon the order of liens, rather than preferences of the debtor. The most senior debts may be the only debts repaid due to the larger number of debts compared to asset sale proceeds. Student loans are often classified as senior debts and are paid in first priority.

In Chapter 13, debtors enter into a reorganization plan and make payments over several years to repay a percentage of total debts. The Chapter 13 plan establishes new terms for the repayment of debts, and lenders must consent to the plan’s terms. While a complete discharge of a student loan is nearly impossible, it is probable that the loan will be restructured through the bankruptcy plan, and the borrower’s payments each month will be lowered to a more affordable sum.

While it would be nice to have Chapter 7 or 13 bankruptcy eliminate outstanding student loan debt, total discharge of that debt seldom occurs.  More often, student loans are paid first as senior debts or paid through installments in Chapter 13.

*from a recent blog at attorneys.com

 

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Student Loans the new SP Bubble?

Graduate - Gril holding signChris Street chimes in with an article published by American Thinker, regarding the possibility that student loans may be the new sub-prime bubble.  Check it out

On April 15 Tax Day, Americans paid about the same amount of income tax as total student loans outstanding. The St. Louis Federal Reserve on the same day published a report titled ‘Student Loan Delinquency: A Big Problem Getting Worse?’ The Fed has determined that of the $1.3 trillion in non-bankruptcy-dischargeable student loans, the delinquency rate for students in repayment is over 27 percent. With tuition at the University of California and other top schools growing faster than inflation, student loan defaults are skyrocketing.  Read more.

Report: Distressed private student loan borrowers driven into default

Graduate - Gril holding signInteresting article from Central Valley Business Times on Student Loan borrowers.

Struggling private student loan borrowers describe being driven into default with very little information or help when they get in trouble, no affordable loan modification options available, and alternatives to default that are temporary at best, read more here.