Consumer debts are debts that have "been incurred by an individual primarily for a personal, family, or household purpose," according to the website www.Duhaime.org. Although student loan interest is often tax-deductible, student loans are nevertheless considered a type of consumer debt. In fact, in the fall of 2010, student loan debt surpassed credit cards as the biggest source of consumer debt.
What's Considered Consumer Debt
Debts that are used to consume goods and services, such as student loans, credit card loans and auto loans are consumer debts. If you finance a boat or a vacation, that's a consumer debt as well. Mortgages are not considered consumer debt. There has been some disagreement in the courts over whether or not student loan debts are considered consumer debts, especially if student loan money was used to purchase goods and services outside tuition. However, the courts have upheld the classification of federally backed student loans as consumer debt.
Why It's Important
Consumer debts are often wiped out in a bankruptcy filing, but the rules on student loan debt collection got stricter after the Higher Education Technical Amendments of 1991, which eliminated all statutes of limitation with regard to time limits. Hefty collection and commission fees of 25 and 28 percent, respectively, are tacked on to what you already owe. The government can also garnish your wages or Social Security income to repay defaulted student loan debt. Liens can be placed on your property as well.
What to Do When You're Delinquent on Student Loan Debt
You must work out a repayment plan with your student loan lender unless you want debt collectors chasing you indefinitely. You may be able to stretch out your payments over a longer period of time, or even ask the lender to postpone collection efforts until your financial situation has improved. You may also consider consolidating your loans into one loan that spreads your payment out over a long period of time, such as a home equity loan.
The only exception to having a student loan discharged in a bankruptcy proceeding is if the borrower can show undue hardship. Discharges are rare. You must be able to show that you cannot meet basic living expenses while paying your student loans. You must show that you've made a sincere effort to work with the lender to repay the loan. Unfortunately, you must also prove that your bad financial luck will continue, even if the student loan debt is wiped out. Courts probably won't be sympathetic to your case unless you won't be able to work, perhaps indefinitely (for example, if you've become physically disabled and have no other means with which to repay the loan). Other consumer debts, however, may be treated differently. If you're in financial trouble and are considering bankruptcy, consult an attorney. But be prepared to repay what may be your biggest consumer debt of all: your student loan.