Bankruptcy and Student Loans can be a very bad mix.
Imagine that you have just completed your studies and you are about to face the world at large as a qualified professional in whatever field you have chosen to make your career. Possibly as a student, you were unable to finance your studies by working, or your family was unable to help you out too much. You were tempted by the student loans that seemed so readily available at that time. As you set out on adult life, possibly married with a mortgage and children, you are now finding these loans a real burden and your financial affairs are in a mess. There are some people in your position who have considered filing for bankruptcy protection. However the bad news is that since legislation passed in 1998, loans taken by students were found to be non-dischargeable. The reason for this is that the government agencies who had underwritten many of these loans had to write off so many of them due to bad debt.

Former students who file for Chapter 7 bankruptcy now have to rigorously prove that they will be caused severe financial hardship if they have to repay these loans. Many students had discovered a loophole that if they applied for bankruptcy when they had no assets, then the courts were unable to do anything to collect their cash. In those cases, the courts would write off a proportion of the debt and give the erring student a very protracted time to repay the balance. Public bodies are finding that bankruptcy and student loans seem to go hand in hand, and they are much warier of taking on this form of finance.
Former students are rapidly discovering that Chapter 13 bankruptcy applies to them as to any other person, and they have as much of a legal obligation to repay their debts as the next person.  Many people who find themselves in this situation are encouraged to sign a form of trust deed by the court.  The courts will draw up the deed based on the debtor’s ability to repay their debts, preferably in a period of less than five years.  To satisfy the court in this instance of bankruptcy and student loans, the debtor must show that they will be capable of establishing sufficient income during the period decided, whilst maintaining a reasonable lifestyle.

In simple terms, if the debtor owes $60,000 for the loans taken, the court appointed trustee will divide the sum up to a maximum of sixty monthly payments of $1,000. If the debtor feels that under the terms of his Chapter 13 bankruptcy and student loans agreement they can meet their commitments earlier, then the court will give them every encouragement to do so
In any event the courts will encourage the debtor to be realistic in their assessment to settle their bankruptcy and student loans and will be reluctant to agree to any proposal which seems to them unrealistic. The court has experience that settling this issue will take up a very large chunk of the debtor’s income for the period that they will be settling their bankruptcy and student loans. Whilst the court will fully understand that the debtor will be anxious to settle their financial commitments as soon as possible, they also expect them to take a realistic approach to their problem.