Federally Insured Student Loans

Except in very rare circumstances, for all practical purposes, Federally Insured (i.e. "guaranteed") Student loans are not dischargeable.  That means that your obligation to repay student loans, including defaulted student loans that have been assigned to the United States Department of Higher Education, survives your bankruptcy.  There is no statute of limitations on the part of the government to collect upon the debt.  Even if you signed a promissory note 20, 30 or 40 years ago, the government can enforce the student loan obligation against you.  Furthermore, no court order is required by the government or a collection agency hired on their behalf to enforce the student loan obligation through wage garnishment, which is typically 15% of your gross income.  The government can therefore collect fifty percent (50%) more than a bank, credit card or other lender can seize from your wages through wage garnishment.  If you can demonstrate that the wage garnishment will cause financial hardship, the government or collection agency may suspend the garnishment.  However, your definition of financial hardship and the collection agency's definition of financial hardship is likely different. The good news is that if you die or become totally and permanently disabled, you can get out of your student loan obligation.  For more information, view the United States Department of Education Collections Guide to Defaulted Student Loans.

Can Bankruptcy Help Me in Any Way With My Defaulted Guaranteed Student Loan?

Possibly. Your Chapter 7 discharge of debts may free up some of your money that you can now use to pay your student loans if you were paying on credit cards or old medical bills before you filed for Chapter 7.  Chapter 13 bankruptcy is different.  To illustrate, let's say, hypothetically, that when you filed for Chapter 13 bankruptcy in April 2011, you owned a 2006 Ford Explorer with 105,000 miles on it in fair/poor condition.  You want to keep the car, but can't afford the monthly payment. You bought the vehicle more than 910 days before you filed and it is your personal use vehicle.  You paid $26,000.00 for the car, put $1,000.00 dollars down plus tax and financed the rest at 16% APR for six (6) years.  Your monthly payment is $542.30. You are now two (2) months behind on car payments and the balance due on your loan is $17,353.00. You have 42 payments left on the loan.  You are in default on your student loan and not paying towards it. We determined that the Kelly Blue Book retail value for this car is $13,500.00. If you are eligible for Chapter 13 bankruptcy with a 20% plan, you can what is called "cram down" upon the creditor to whom you owe for the car, and pay not what you fully owe for the car, but what it is worth, retail, at 5.25% interest over the life of the plan, with the balance of the finance company's claim paid at the same rate (in this case 20%) as the other unsecured creditors. With all other things remaining equal, you would still pay the trustee $542.30, but now $256.31 per month would go towards the secured portion of the vehicle, and the rest, $285.99, would go to your other creditors, including the Student Loan Debt, which is also included in your Chapter 13 plan. Since you are now paying significantly less for this vehicle in monthly interest because you have included the car in the Chapter 13 plan, the savings in interest will be turned over to the Student Loan Lender (as well as your other unsecured lenders). The bankruptcy system reduces high interest rate loans like the one described here, and redistributes those funds to your other unsecured creditors, like your student loan. At the end of your plan, the car will be paid off, but the student loan will survive your Chapter 13 (unless the Chapter 13 plan payment happens to pay off the Student Loan in full).  However, much of that additional interest that you would have otherwise paid to the automobile finance company outside of Chapter 13 bankruptcy will go to reduce the balance on your student loan.  You will end up better off this way than you would have had you remained in default and did not pay the student loans.

If you are struggling with debt, including guaranteed student loans, and would like more information on bankruptcy and how bankruptcy can help you get rid of debt, I am here to help. The initial consultation is free and together we will formulate a plan to determine if bankruptcy is right for you. I offer personal attention and my rates are reasonable. Contact my office today online or by telephone at 585-546-7410 to speak with an experienced New York bankruptcy attorney.    

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