Some Chapter 7 cases can discharge student loans but the state of the art solution has been a Chapter 13 for a situation where the individual owes less than 360,000 in student loan debt. And although a Chapter 7 or Chapter 13 Bankruptcy student loan discharge seems impossible filing can make the debt noncollectable.
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- Filing a Chapter 13 normally makes a student loan affordable. I have gotten Chapter 13 cases with payments as low as 100 per month approved and completely stop multiple garnishments. Technically Chapter 13 payments could be a zero payment but something needs to be in the plan to pay the attorney.
- Many Chapter 13 cases are filed to wait out the student loans for two major reasons.
- Private student loans may not be dischargeable but the statute of limitations and other defenses do apply to them. Only government student loans have no statute of limitations defense.
- Student loan debt is now (2012) running about a 40% default rate with well over a trillion owed in student loan debt, more than all the credit card debt. At some point the system will probably have to allow some changes to allow a discharge. Since a Chapter 13 can always be dismissed and can often be converted filing a Chapter 13 allows the person to normally convert later to take advantage of any change in the law.
- A Chapter 7 or Chapter 13 Bankruptcy student loan hardship discharge is very difficult to obtain but by waiting out the debt a person may become fully disabled and then discharge the debt. For Debtors close to retirement this is a real benefit because of how easy it is to obtain the disability discharge for federal loans after age 65. Many clients file a Chapter 13 at age 55 and merely file two cases consecutively to wait out the student loan.
There is the IBR (Income based repayment plan). Most jurisdictions require you to first file and attempt to get approved for an income based repayment consolidation for the federal student loan debts before applying for a hardship discharge. There is no IBR for private student loan debts. In some extreme cases the judges will sometimes not require this extra step when it can be shown that the Debtor will never be able to repay even a small amount without a hardship. If you are on a subsistence living there is no IBR that helps. IBR only consolidates the federally guaranteed student loans. For this reason you have to start any student loan case by looking at what loans are privately held.
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