Fitting Student Loan Income into Bankruptcy

Help with Form B6I - Current Income of Individual Debtors

Sep 27, 2009

Filing bankruptcy does not disqualify applicants from obtaining federal student loans. It may, however, complicate the bankruptcy paperwork just a bit.

Both forms of personal bankruptcy – Chapters 7 and 13 – use form B6I, Current Income of Individual Debtor(s). Although the form is fairly self-explanatory, some simple guidelines may help:

At the top go basic identifying information and employment information on both debtor and spouse. (Note – it is possible that when one member of a married couple files bankruptcy, the other may not need to. It’s best to check with a qualified bankruptcy attorney or legal services office.)

Lines 1 and 2 are about employment income and overtime. This is an “Estimate of average or projected monthly income at time case filed” if the filer doesn’t have pay stubs for accurate figures. This is for gross pay – before payroll deductions are removed. If the debtor is paid weekly, bi-weekly and most months are not exactly four weeks, he will need to pro-rate for an accurate monthly income. To pro-rate weekly pay, multiply the average weekly income by 52 (weeks per year) then divide by 12 (months per year).

Lines 4 a – d are about payroll deductions, again to be estimated averages unless pay stubs are available. Filers need to keep the numbers as accurate as practical. Pro-rating practices apply the same here as with lines 1 and 2. Specific other types of income are listed in lines 7 through 12. Business income is to be “net” – after expenses. A good profit/loss sheet can be a great help!

Line 13 is where “other income” goes. According to classes taught by Montana Legal Services Office in Helena, MT, federal student loans are part of the “other.”

Disposable Student Loan Money Considered Income

After the costs of tuition, fees and books are met, that portion of the student loans that remains is considered income. That income is spread over the period of time that the loan is to cover. For instance, for Fall semester, it goes from early September to late December. If there were $1600 left after school expenses, that amount would be prorated over those four months, giving an income of $400/month.

Since loan money is distributed in halves over Fall and Spring semesters, the same method would be used to figure out monthly income from student loans from January through May (or whenever Spring semester ends). Those attending Summer term may wish to hold back some of those funds until that time, stretching a smaller portion of the loans over Fall and/or Spring.

For example, using that same figure of $1600 left over for each Fall and Spring semesters, if the student planning on summer term holds back $200 from each semester, leaving only $1400 for each Fall and Spring, that would give monthly incomes of $1400/4 months, or $350 from loan money for the months covering Fall and Spring semesters.

How much of that remaining $400 is considered income depends on how much will be required for tuition, books, fees and the like. Without other financial aid for summer term, chances are that the whole thing will be eaten up in school costs and still possibly not cover it all.

Expected Changes to Income or Expenses

On line 17, bankruptcy filers need to project any expected changes in income or expenses. If the student loan income isn’t going to stretch over the whole year, this is the place to indicate that. If the student is working and expects to go from part-time to full-time or knows he is going to be laid off when his class schedule changes, again, that needs to be disclosed.

Students filing bankruptcy will need to consider all facets of their income, their expenses and their ability to meet those expenses on projected income. If the judge feels that the student won’t be able to keep up car or housing costs, the bankruptcy may be denied until such time as the student’s income can meet his expenses.

While this article has been thoroughly researched via trusted legal resources, it is intended purely for informational purposes and not to be construed as legal advice. Persons considering or needing counsel about bankruptcy should contact a bankruptcy attorney or their state legal services office.

The copyright of the article Fitting Student Loan Income into Bankruptcy in Student Loans is owned by Elizabeth Linehan. Permission to republish Fitting Student Loan Income into Bankruptcy in print or online must be granted by the author in writing.