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Student Loans and Massachusetts Bankruptcy

Bottom line: it is very hard to discharge student loans in Massachusetts bankruptcy. The law requires that you affirmatively prove an “undue hardship” and it’s hard to prove unless you are permanently disabled. The following is an outline of what steps you can undertake, however. We have previously written about a financial education and this article is an overview of what to do to get started. Note that student loans may not be dischargeable in bankruptcy in Massachusetts, but you can still file for bankruptcy protection and get a fresh start by getting rid of all your credit card debt.

In 2008, 7% of those that were to begin paying back student loans defaulted. Thus, don’t take out more student loans than you can reasonably foresee paying back This may seem simple, however, just because they are available, does not mean you should avail yourself of the privilege. Since they are hard to discharge in bankruptcy, they will stick with you forever. Unpaid student loans can even reduce your Social Security benefits when you retire! Financial planners often suggest community colleges for a year or two and then state schools to reduce the ultimate student debt.

For those with existing student loans, find out exactly what you owe. For federal loans, you can go to the National Student Loan data system to determine who you owe what to. For private loans (yes, if they are student loans they are just about as difficult to discharge) you need to go to the lender.
Next, know how delinquency works. For Staffords, Federal Direct Loans and GradPLUS loans, you are delinquent when your loan payment is 21 – 30 days late. At 60 days it gets reported to the national credit bureaus and your FICA score is likely to be adversely impacted. Of course they start adding fees and interest accumulates.
Apply for deferment. With good cause, you can defer monthly payments for a year. This works when you have economic hardship, are a part time student, in the military, or some other specialized criterion. A deferment can be renewed three times. The feds will pay the interest on Stafford loans, but not on unsubsidized loans.
Apply for forbearance. This too can work in one year increments, but for up to five years. There is no deferring the interest in a forbearance, however. This works when you have a short term cash flow problem. Unfortunately, many of our clients are in default. If you don’t make a payment for 270 days and you have not qualified for deferment or forbearance, you are in default for federal loans. If you can catch up within ten months, you can “rehabilitate” your loan and make “reasonable and affordable’ payments during that time. While this is hard to do, it does erase the default from your record.
Otherwise you can “consolidate” your loans with the Federal Direct Loan program and undertake an “income based repayment” program. (Beware, you generally cannot do this a second time.) This is usually a 25 year payment plan.
If you are in default with private loans, the credit agencies are often notified much sooner, and payment plans are harder to work out. On the other hand, private lenders are subject to the six year statute of limitations, but they are more likely to work out a settlement if a family member or friend will offer a percentage on the dollar.