Student Loans & Bankruptcy

What Happens If You Can't Pay Student Loans After Bankruptcy?

Last year I was out of work and could not afford to pay my bills. Most of my debt was student loans.

I went to an attorney who said I should file for bankruptcy. He said my student loans would be discharged.

However, after I received my discharge, I kept getting harassed by bill collectors for the student loans. I told them I had gone bankrupt, but they said it made no difference. They have threatened to sue me within the next 30 days, unless I make up over a year's missed payments.

I called the attorney and he denies ever telling me my student loans will be discharged. He offered to renegotiate them if I pay him another fee.

I don’t have the money, what can I do?

Amy

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As you have found out, student loans are not dischargeable in bankruptcy. The US Congress has decided that student loans must be repaid as a matter of public policy.

A competent attorney would know this. If most of your debt was student loan, he should have also known that it would really do you no good to file for bankruptcy.

To make matters worse, in December 2005, The United States Supreme Court unanimously ruled that the Social Security Department can reduce your old age social security payments by a certain percent - in this case 15% - for those who have defaulted on their student loans. The money is used to defray the outstanding student loan balance.

In this case the pensioner argued that he was disabled and it would be a hardship to lose a portion of his retirement payments.

The Supreme Court did not agree. So for those who have ignored repaying their guaranteed student loans, the day of reckoning may still lie ahead.

In this decision the Court might have laid to rest for once and for all the supposed "hardship" claims raised against student loan collection in bankruptcy court.

It seems you now have three options:

First: if you have federally guaranteed student loans contact Sallie Mae. Tell them you defaulted on your student loans because you were unemployed.

Their rules state that: "a deferment must be granted if your loan is not in default or, if your loan is in default, the deferment began prior to the default date". This seems to apply to your case, although I don’t have enough facts.

You would have to provide the documentation required by law.

If this works, you can probably work something out with them that you can afford. Read Student Loan Repayment Options for more information different ways you can repay your loans.

If you don’t qualify, contact your local Bar Association’s Lawyer Referral Service and ask the names of lawyers who specialize in consumer debt issues and/or bankruptcy. You will be entitled to a free consultation.

First try to determine if you can reopen your bankruptcy case and claim undue hardship with regard to the student loans.

If not, see if they would be willing to renegotiate your debt for you. You’re going to need some cash to do this. Perhaps you can borrow from relatives or sell your car.

Your creditors probably realize by now that you can’t come up with the money and might cut out a large chunk of the debt if you can find the means to pay off the rest rather quickly. You might have to work at Wal-Mart stocking shelves or at McDonald’s flipping burgers, but there’s not much you can do about it at this point.

Finally, you can look into a legal malpractice case against the first attorney, but your damages would be limited unless you could prove you would have been one of those who would have qualified for a hardship discharge.

Of course, if you succeed in doing so you’ve proved your case. But you damages might just be what you paid in legal fees to the first lawyer and what it cost to reopen your case and get the debt discharged.

It sounds like you made no more payments on the student loans, so I don’t know what other damages you could collect. Emotional pain and suffering is usually not an item of damage in a malpractice case, although that can vary from state to state.

Again call the Bar Association’s Lawyer Referral Service for the names of two or three qualified legal malpractice attorneys. You can get a free consultation and see if you have a worthwhile case.

Legal malpractice cases are tough to prove and as I said damages can be limited. Unless you have a fairly clear cut case and substantial damages, it probably isn’t worth pursuing. Also, it will do nothing to stop the debt collectors or lawsuits.

If you don’t succeed in steps one or two, you’re really going to be in a tough situation. You will have to swallow your pride and get a job, no matter have “overqualified” you may be.

Borrow from friends and relatives if possible.

Move back in with your parents to cut living costs and sell your car.

Go on a very strict budget and use every extra cent to pay off debt. You can’t go bankrupt again for another seven years, so you will have to knuckle down and get to work.

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