Federal Law Governs Bankruptcy And Student Loans
As graduates leave college and enter the working world, there is often the reality that the amount they owe on loans they received for college expenses exceeds their foreseeable earning power. Many times they seek financial relief through bankruptcy and student loans are often included in the filing. However, recent changes in the bankruptcy code have made student loans non-dischargeable through bankruptcy proceedings.
There are few circumstances in which student loans can be discharged and very strict requirements have to be met for a debtor to file bankruptcy and student loans being wiped off the slate. The rules concerning hardship conditions are usually hard to prove to the court and most former students are left with a few options of how to pay off the debt through court-ordered payments,
While Chapter 7 bankruptcy and student loans do not usually go together, the option of filing a Chapter 13 bankruptcy can provide some relief for the debtor. Under this filing no debts are wiped clean, rather the student will pay back all loans through the bankruptcy court trustee at a monthly amount established by the court. The student is protected from legal proceedings in bankruptcy and student loans are often put at the top of the debt list by the court, meaning they receive a higher priority in receiving payments before other obligations.
Additional Student Options Included In Law
While bankruptcy has been ruled out as a means of eliminating student debt, the law has allowed some relief for them through stricter collection guidelines. Typically, if a debtor's debt is judged delinquent by a court and restitution is ordered, the debt holder can garnish wages as well as income tax returns and other income. Without the protection of bankruptcy and student loans that can be the target of garnished wages, the court has limited the amount collectable to ten percent of the debtor's net income.
In most case, the amount allowed is 25 percent, for child support and alimony it is 50 percent of the take home pay. A student may opt for Chapter 13 bankruptcy and student loans included in the filing will paid off under the court schedule. The advantage of Chapter 113 is that the student is protected from any collection activities provided the monthly payments are made in a timely manner.
The laws were changed to accommodate the many lenders who were growing reluctant to provide these unsecured loans to students or their families, only to have them discharged under bankruptcy proceedings.
