Student Loan and Bankruptcy in New York

Student Loans Problems in New York City

Many people in New York, and particularly in Manhattan, have large student loans for undergraduate and graduate college education. A student loan debtor (person who owes money for a student loan) can often obtain deferment or consolidation of his or her student loans to delay making payment or lower the payments. However, for people with very large student loans and income that is lower than they had anticipated, student loans can be an enormous problem. This is especially the case for someone who never finished his or her course of study or obtained a degree, or obtained a degree for which there is not much demand in the marketplace. In addition, if someone obtained an expensive graduate degree, such as medicine or law, but but is working in a lower paying field than his or her field of study this is particularly a problem. Finally, the cost of living in New York is one of the highest in the country and people living here have a significantly higher cost of living than in many other states.

Due to changes in the law regarding student loans, there is no statute of limitation for student loans — meaning the loans do not become unenforceable by the passage of time. This means that long after someone is out of school he or she can still be saddled with high student loans.

It is very difficult to discharge (wipe out) student loans in bankruptcy, Due to changes in the law this is only permitted in very limited circumstances. Typically the student loan debtor must be able to prove that he or she has no ability to earn even a modest income. Typically a debtor will need to show serious and permanent medical conditions that limits his or her ability to earn income, or that he or she is only able to earn a very limited income due to other special circumstances.

Using Chapter 13 Bankruptcy for Student Loans

However, a student loan debtor can still obtain relief from his or her student loans through chapter 13 bankruptcy. In a chapter 13 bankruptcy, unless the student loan creditor has a judgment that has created a lien on a valuable asset of the debtor (such as a judgment lien on a house of the debtor that has equity in excess of exemptions), the student loan creditor is just an unsecured creditor. This means that the student loan creditor is treated the same as other unsecured debts, such as credit cards.

We have described in detail how chapter 13 works in prior Blog posts ( Chapter 7 or Chapter 13 Bankruptcy Filing in New York? ) and on the Frequently Asked Questions (FAQs) How does chapter 13 work? of the Starr & Starr, PLLC website. Basically, each month the debtor in a chapter 13 case will make payments to the chapter 13 trustee based on the available “surplus” in his or her monthly budget. For many people the monthly payments required under a chapter 13 plan are considerably less than the monthly payments they would be required to make outside of bankruptcy. The length of a chapter 13 plan is three to five years. While making payments in a chapter 13 plan the debtor is protected from any creditors collection or judgment enforcement efforts. For many people this can allow them the opportunity to get their finances back on track. When they come out of bankruptcy at the end of their chapter 13 plan — after three to five years — they will be able to wipe out their dischargeable debts, such as credit cards, doctor’s bills, etc. The student loans will not be wiped out in the chapter 13 bankruptcy and the debtor will still owe any remaining unpaid balance. However, for many people they will be in a much better position to pay the student loans debts off than if they had not filed for chapter 13.

Please feel free to contact our office for further information or to schedule a free initial consultation.