It might come as a surprise, but one of the hottest topics at the annual convention of the National Association of Consumer Bankruptcy Attorneys (NACBA) was student loan debt.
There are a couple of reasons for that, said Richard Cook, a board-certified bankruptcy attorney and owner of Cape Fear Debt Relief in Wilmington. One reason: student loan debt is one of two types of debt (the other is mortgage debt) that cannot be discharged through bankruptcy. The second reason is that student loan debt is Americans’ second-most-prevalent type of debt, right behind mortgage debt.
NACBA has taken note of the problems facing student loan borrowers, said Cook, who attended the NACBA convention in April. “Congress has written laws such that you cannot discharge student loans through bankruptcy,” Cook said, referring to the Bankruptcy Reform Act of 1978, known as the bankruptcy code. “NACBA is lobbying for changes in bankruptcy laws to allow for some student loan relief.”
If a person is struggling with mortgage or student loan payments, there are programs to help without filing for bankruptcy, Cook said.
“There is an income-driven repayment plan for student loans that are owned by the government,” Cook said, adding that about 90 percent of student loans fall into that category. “If you can submit income documentation, you can usually reduce your payments. If you make a good-faith effort and pay on time, after 20 years, the balance is forgiven. That’s what I recommend.”
Similarly, according to Cook, there is a mortgage loan modification program for borrowers whose loans are guaranteed by Freddie Mac or Fannie Mae. “You can extend your loan terms and drop the interest rate to 2 percent.”
While the two programs offer some relief, the onus is on borrowers to make the programs work for them. That involves contacting the loan servicer directly to initiate payment modifications, and keeping close contact with them throughout the process.
“Keep copies of everything, and be persistent,” Cook advised. “The lender can add on collection fees if you go into default. It can garnish your wages without going to court. It can take your income tax refund.”
Unfortunately, working to reduce the burden of mortgage and student loan debt does not go hand-in-hand with filing for bankruptcy to get out from other financial obligations.
“This was a big topic at the conference: if borrowers are in these programs and they file for bankruptcy, they are thrown out of [student and mortgage debt modification] programs,” Cook said. “NACBA is working to prevent this. We don’t want to put a borrower in a worse situation if they file than they were in before.”
While student loan and mortgage debt continue to be widespread, bankruptcy filings at present are a down about 50 percent from their high in 2010-2011, when Cook would handle about 50 cases a week. But, he said, many of today’s filings are more complex and many involve retirees.
“Debt is migrating to credit cards,” Cook said. “People are budgeting to break even, savings rates are low, and people are exhausting their retirement [accounts], especially if they have health problems or experience a crisis. We see people working longer, cutting expenses to the bone, moving in with family.”
Addressing financial crisis through bankruptcy is a fundamental right afforded through the U.S. Constitution, Cook said. And there are provisions of the bankruptcy code that can protect retirement accounts and property.
The ideal way to avoid debt crisis is to plan ahead, according to Cook. “A good rule of thumb is that your student loan debt should not exceed your first-year salary,” he said, adding that borrowers should be aware of early signs of trouble: falling behind on loan payments, using credit cards for daily needs.
“The biggest thing is staying in touch with the lender,” he said. “The worst thing is putting your head in the sand.”