Dealing with Student Loans in Bankruptcy

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Check out this story from the Wall Street Journal, which explains how people struggling to pay down student loans and other debts by filing for bankruptcy, often end up owing even more on their student loan at the end of the bankruptcy process. According to the Wall Street Journal student-loan debt, at about $1 trillion, has outgrown credit cards as the largest source of consumer debt, excluding mortgages.

Under the federal bankruptcy code, consumers almost never can get rid of student loans. To compound the problem, the process under Chapter 13 generally restricts  borrowers from making full payments on student loans during the three-to-five-year bankruptcy period, which allows lenders to add interest, late fees and other penalties to the student-loan balances during that time.

According to Sen. Elizabeth Warren (D., Mass.), a consumer-protection advocate, “This provision takes a bad situation and makes it worse—forcing people in financial trouble to divide their meager resources so that they can’t stay current on their student loans.”

Ideally, you would continue to make student loan payments while winding your way through the bankruptcy system and do whatever you can to pay down your student loan balance before your bankruptcy is filed. You may be forced to make your student loan payments inside a Chapter 13 bankruptcy plan. Some options for lowering student loan payments include consolidation and  income-dependent repayment.

Another option is to file multiple bankruptcies. Filing Chapter 7 to wipe out debts before filing for Chapter 13 bankruptcy may allow you to pay down the loan during the 3-5 year term of your Chapter 13 Plan and avoid compounding interest.

We’ve said it before and we’ll say it again:    Don’t wait to seek help with your debt problems. The longer you wait, the fewer options you have. Contact Cossitt Law at (406) 752-5616 to discuss your options. We can take a look at your situation and provide expert legal guidance based on four decades of bankruptcy experience.


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