When most people think about the bankruptcy system helping people gain relief from debts, the first two kinds of debt they usually bring to mind are credit card debt and mortgages. But, as a bankruptcy attorney in Indiana, I very often find myself dealing with student loan debts along with those others. And, as I’ve written in earlier blogs, student loans can pose the greatest problem of all. That’s because it is very, very rare for student loans to be discharged in bankruptcy.
To understand what’s going on today with student loans, you need to remember that student loans for college started out being government loans. Then, about 15 years ago, private lenders started getting into the student loan business, issuing federally backed loans. The capital for all those loans came from selling securities to investors backed by the loans. Now what’s been happening with the credit crunch and so many people having difficulty paying back the loans, there’s not very much of a market for the loan-backed securities. Many companies are actually getting out of the business. So, there is less money available for students, and the fees for servicing the loans are higher.
Meanwhile, what many parents had been doing was taking out home equity loans to help pay for their children’s college. I don’t need to tell you that it’s a lot harder now to qualify for a home equity loan. What’s more, the value of many homes has fallen to the point that there’s very little equity to borrow against! It’s a real squeeze, getting money for college.
Where I come into all this in my Indiana bankruptcy law practice is that my work involves helping people make a plan to handle all their debts. Depending upon their situation, I am usually able to help them negotiate a plan of repayment with their mortgage lender and perhaps with other creditors and avoid or at least defer filing bankruptcy. Or, they will file Chapter 13 (repayment plan) bankruptcy and pay off all their loans, including student loans, over time, under bankruptcy court supervision. If neither of these two options is available, debtors can file Chapter 7 bankruptcy, under which many of the debts will be discharged by the court (probably not including the student loans).
The work I do is aimed at providing a fresh financial start for people whose circumstances have become impossible for them to deal with alone. Since I know that student loans, with almost no exceptions, will need to be paid back, I try to help people get smart about student loans well before trouble looms.