Should You Declare Bankruptcy for Student Loans?

You may have thought about filing for bankruptcy if you are buried in student loan debt with no end in sight.

Unfortunately, paying down student debts in bankruptcy may be one of the most difficult chores in an already convoluted legal procedure.

Still, for some debtors, attempting to discharge student debts through bankruptcy may make sense. If you believe it’s worth the effort, here’s what you should know before you begin.

What Is Student Loan Bankruptcy?

Although there is no specific “student loan bankruptcy” procedure, borrowers may use the word to allude to getting liberated from student debts after filing for bankruptcy.

While it is feasible to get rid of student loan debt with this method, the procedure is difficult, there are few success stories, and declaring bankruptcy has negative effects on your financial future.

Student debt bankruptcy is more difficult to file than even a $300 loan no credit check bankruptcy, but it’s possible and you have a few options, which we’ll cover next.

How Bankruptcy for Student Loans Works?

Falling behind on your student loan payments will have a significant effect on your life if you are contemplating student loan bankruptcy. Perhaps your earnings have been garnished as a result of a lender’s judgment against you.

Because your federal student loans were outstanding or in default, the federal government may have withheld your tax return and applied it to them.

The financial difficulties you are now experiencing likely include more than simply your student debt. If student debt is your main issue, you are unlikely to be able to discharge it via bankruptcy.

Filing for student loan bankruptcy is difficult, and it does not ensure that you will be debt-free. However, if your credit is in bad shape, bankruptcy may be a better option than struggling to pay your bills.

You must petition for bankruptcy and show that repaying your debt will create an undue hardship to the bankruptcy court.

This must be determined in a bankruptcy court adversary procedure. Your creditors could be present to object to the request.

Student loan bankruptcy is not a distinct sort of bankruptcy. To be successful in having student debts erased via bankruptcy, you must first file Chapter 7 or Chapter 13 and then file an adversary procedure or AP.

The AP must be submitted for your student debts to be considered for discharge.

Which Chapter Do You Want to File?

Individuals who petition for bankruptcy usually do so under Chapter 7 or Chapter 13. Both of these strategies only eliminate specific types of debt.

Bankruptcy Chapter 7

Credit card debt and medical debt are examples of eligible unsecured liabilities that may be discharged under Chapter 7 bankruptcy, often known as liquidation bankruptcy.

On the other hand, a court-appointed trustee may confiscate your non-exempt property and sell it to recoup your losses for your creditors.

Bankruptcy Chapter 13

For people who have sufficient assets or income to pay their creditors, Chapter 13 bankruptcy, also known as a wage earner’s plan or reorganization bankruptcy, may be an option.

Your property won’t be sold by the court, but you will be given a new repayment schedule (typically lasting three to five years) so that you may keep paying off your creditors. Your qualifying leftover debt is discharged at the end of the payment plan’s terms.

Bankruptcy Discharge: Other Ways

Don’t give up hope if discharging student loan debt through bankruptcy isn’t a viable option for you. Other choices may provide you with some debt relief.

Income-Driven Repayment Plan

For a reduced monthly payment on federal student loans, you may apply for an income-driven repayment, or IDR, plan.

Your loan servicer — the business that maintains your federal loans — will extend your payback term to 20 to 25 years and limit your payments at a percentage of your discretionary income under these options. There are now four IDR schemes in place.

Most borrowers will qualify for at least one IDR plan, according to Federal Student Aid, a division of the U.S. Department of Education.

Some debtors may be eligible for payments as low as $0, which may provide considerable financial relief from your debts. Borrowers with $0 payments only have to make loan payments if their income changes.

State Student Loan Forgiveness Program

According to media sources, US President Joe Biden plans to eliminate $10,000 in student debt for millions of Americans and up to $20,000 for poor and moderate-income groups who have previously earned a Pell award.

Loans will be made available to persons earning less than $125,000 per year or whose families make less than $250,000 per year.

The Biden Administration is also anticipated to extend the freeze on monthly payments and interest until the end of the year once again.

According to the Federal Reserve, by the end of 2021, the total amount of outstanding student debt in the United States reached $1.75 trillion which is a record compared to previous years. With current crises like pandemics or wars, it’s not surprising that in the US, many people will need a debt relief process.

Debt Consolidation

You might combine your debts with a debt consolidation or management plan, preferably at a reduced interest rate or monthly payment. Consolidation may be out of reach if you have bad credit or do not have a cosigner.

In such instances, a debt management plan established by a nonprofit credit counseling service might put you on schedule to pay off your debts in three to five years.

Deferment or Forbearance

If you are experiencing a temporary financial difficulty, such as job loss, you may be eligible to delay or forbearance your payments.

Deferment and forbearance are available for all federal loans.

● Deferment: You may temporarily cease paying payments on some types of government loans. You may not be required to pay the cost of interest that accrues on your loan during a deferral for certain loans.

● Forbearance: A forbearance allows you to postpone payments for up to 12 months at a time. In contrast to a deferral, you must pay the collected interest when the time expires.

If you decide to return to school or are encountering financial difficulties, you may delay or forbearance your federal student loan payments.

You may not have to pay any interest while in deferment (depending on the kind of loan), but you must pay interest on the loan while in forbearance. Private student loan providers may also provide deferral or forbearance alternatives.

Loan Forgiveness Due to Disability

If you are incapacitated, you may be eligible to have your debts erased without having to file for bankruptcy.

If you are disabled and wish to apply for a debt discharge, contact your lender’s customer care department directly. Explain your status and what has changed since you obtained the loans, and inquire if the lender provides debt discharges in the event of incapacity.

Conclusion

Keep in mind that bankruptcy is a tool, and like any tool, it might be effective in certain instances but not in others.

It is critical to discuss your whole financial position with a student loan lawyer who has vast expertise in both bankruptcy and non-bankruptcy alternatives.

You may overlook the ideal answer for your requirements if you don’t do a thorough study and grasp the implications of each alternative accessible to you.