In my Asheville bankruptcy law office, I have seen many consumers, young and old, approach me about problems associated with their private student loans. Most folks already recognize that discharging those loans in a bankruptcy case can be problematic. Still, for consumers operating on a limited budget, the only payback options on their private student loans can be unreasonable and unworkable.
Federal or Private Loans?
If you are unsure whether your student loans are private or federal, you can visit this website. If your loans appear on the report after registration, your loans are federal loans. If not, your loans are likely private student loans. For federal student loans, an income-based payback option is usually available through the federal government’s direct loan program (which originated in 2010). Start there for federal loans if you haven’t already.
Private Student Loans in Chapter 13
Because direct loan payback options based on income are unavailable for private student loans, private student lenders frequently will demand a monthly payment far in excess of what a consumer can pay based on their household budget. Filing a Chapter 13 case can provide time for the borrower to reorganize their finances over a three to five year period. Importantly, the Bankruptcy Court’s automatic stay will protect co-signors for the same period of time. A co-signing family member’s credit will not be adversely affected by this type of bankruptcy filing. The required payment amount to the private student loan lender will be dictated by the borrower’s budget, and frequently that payment is only a fraction of what the private lender is requiring outside of bankruptcy.
Unfortunately, interest continues to accrue on a private student loan while in Chapter 13. This means that the balance on the loan can be more at the end of a Chapter 13 case than where it was when the case began. Because private student loans are generally non-dischargeable, consumers considering Chapter 13 bankruptcy to deal with their private loans should take extra care to determine how their budget will operate post-bankruptcy.
Bankruptcy is one of the few options students have to deal with private student loan obligations. It is important to review all options when faced with a dysfunctional budget. For those of you in Western North Carolina, I would be pleased to speak with you during an initial consultation.