Personal Bankruptcy, Student Loans And You

Today’s college graduates have to face financial reality more quickly than just a few decades ago.  You are given only six months grace from your graduation date until you have to start repaying your student loans.  Don’t have a job yet?  Too bad, kid.  Welcome to the real world.  In the 1970’s, college students figured out that by declaring personal bankruptcy, student loans could be forgiven or pushed back a few years.  Unfortunately for future generations of American college graduates, in 1998 the law was changed to make student loans non-dischargeable.

Make Student Loans What?

“Non-dischargeable” is our vocabulary word of the day, class.  Translating it into American English, this means that if you declare personal bankruptcy, student loans still need to be paid.  You cannot get out of it, unless you suddenly drop dead, but that kinda defeats the purpose of getting a college degree in the first place.  The Federal Student Aid Ombudsman (FSAO) says there are only three extremely hard to fulfill criteria for exemption of this non-dischargeable rule.  You must fulfill all three.  They are:

If the loan repayments force you to a “lower than minimum standard of living”.
If the loan repayments will force you into poverty most of the time you need to repay the student loans.
You have to make some sort of effort to repay the loan before filing for personal bankruptcy.  Student loans will usually be dischargeable only if you have been able to make payments for five years.

Your Options

You really don’t have many options left if you need to declare personal bankruptcy.  Student loans can sometimes be consolidated, which can often make paying them back a lot easier, but you will still need to pay them back.  If your college closed permanently before you graduated, then you have an excellent shot of contesting the loans.  But what about for the other 99.9% of college graduates?  If you’ve consolidated and stretched your student loans for years, at this point it can be next to impossible to disentangle who is owed what, and you can challenge the enforceability of the loans.   Since it is the creditor’s job to provide proof of claim about what you owe, this legal loophole might be your only chance.  Otherwise in declaring personal bankruptcy, student loans will still be staring at you in the face.  Creditors are only allowed to take 10% of your paycheck in order to repay a loan.