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Ask Dave

Is Filing Bankruptcy the Answer to Student Loan Debt?

Victor's defaulted student loan amount has almost tripled, and he thinks Chapter 13 bankruptcy is the only way out.

QUESTION: Victor took a private student loan out. He didn’t finish school and eventually defaulted on the loan, having not paid in 5 years. He and his wife wanted to take care of that school loan now, but the guarantor has received judgments for $75,000 against this $26,000 loan. He has just received a letter to appear in court. Should he declare Chapter 13 bankruptcy?

ANSWER: You can probably negotiate resetting the debt and sending payments anyway, under the threat of Chapter 13 bankruptcy. If the interest rate were 10% on a $25,000 loan, that would be $2,500. Having 5 years of that would be $12,500. So, with a few late fees, this would be closer to $40,000. But I’m having a lot of trouble getting to $50,000 or $75,000 from that. I’m going to hire an attorney to negotiate this for me, rather than you filing bankruptcy.

You’ll have to address this, because it’s not going away. The best thing to do is say that you’ve got a $30,000 loan here that you’ll pay $1,000 a month on for 30 months. You’ve got 2 years of delivering pizzas to get this mess cleaned up. Also, on a private student loan, what they can take is whatever they want to take. They could take $5,000 if they wanted to. To them, it’s a bad student loan that they have no federal guarantee on.