You’ve saved for college, but still have student loans outstanding and are considering bankruptcy. Bankruptcy is may not be advisable due to its many negative side-effects and uncertainties. Once you file bankruptcy for your student loans, it stays in the credit history for a long time and creates barriers in employment, apartment rent, etc.
However, in some cases, bankruptcy is the only chance of the borrower. Sure, it should be the last resort; but if it is unavoidable, you need to be well aware of what will happen if you file for bankruptcy on your student loans.
Here are 4 important questions creating the right expectations about the process.
1. Why Is It Hard to Benefit from Bankruptcy on Student Loans?
Student loans are often not dischargeable in bankruptcy.
Many reasons make declaring student loan bankruptcy difficult. First, filing for bankruptcy requires much time and effort. The documentation process is extensive, proving every detail of the borrowers’ financials. Meanwhile, it is still not guaranteed that the debtor will achieve getting rid of the federal or private student loans through a bankruptcy discharge such as ITT.
The court decides on the final decision regarding your request. In court, you need to prove an “undue hardship.” This term involves many requirements that a borrower must satisfy. In general, if the borrower faces “undue hardship,” he/she cannot survive if continuing making payments for the debt. Here is a simple example; if you use a smartphone or buy a cup of coffee in a day, it means you still have a chance to repay the debt.
In short, all the administrative processes and difficulty in proving the need for bankruptcy make it hard to achieve. Yet, keep in mind that private student loan borrowers usually have higher chances than federal borrowers who can access many bankruptcy alternatives.
2. How to Prove “Undue Hardship?
In order to be able to prove the bankruptcy case in court, you should first know the conditions that matter. Courts use different types of tests to evaluate whether the debt should be discharged or not. One of the common tests is called the Brunner test. In general, the Brunner test involves identifying three elements:
- The details of the current financial performance of the borrower, including income and expenses
- The level of expected changes in financial performance during a foreseeable future
- The level of good faith or effort put into solving the debt problem before filing bankruptcy
Therefore, keep in mind that if you have a chance to get a job, probably, bankruptcy will not benefit you. If the borrower is not disabled and does not have dependents or other employment barriers, a better solution is deferment/forbearance to get temporary relief from payments.
Additionally, if you did not try other solutions and directly decided to file for bankruptcy, the court can reject it as you did not put effort into solving the problem.
Besides, there are states using other types of tests. For example, Totality of Circumstances is a similar test, but it does not involve evaluating prior efforts. Meanwhile, one of its conditions includes ‘other relevant circumstances.’ As this condition has no specific borders, it is hard to deal with it and foresee the events. In short, here are some factors mattering:
- Lower than poverty-level income
- No sign of improvement in income for long term
- A dependent borrower
- A borrower with a physical or mental disability
- A borrower with an ill child requiring round-the-clock monitoring, etc.
3. What is the Difference between Chapter 7 and 13 Bankruptcy?
While filing for bankruptcy on your student loans, you need to show which type you apply. Chapter 7 Bankruptcy involves the liquidation process. It means the borrower loses some of the non-exempt assets. These assets are sold, and the funds are used to repay the lenders’ debt. Usually, borrowers with low income can qualify for this type of bankruptcy and can get rid of the debt obligations.
Chapter 13 is only the reorganization or restructuring of the debt repayment process. In this case, the borrowers do not lose their assets. Instead, the court approves a new, more suitable repayment plan to pay back the debt.
With Chapter 7, the negative effect of bankruptcy stays in the credit reports for as long as 10 years, while Chapter 13 remains around 7 years.
4. What Can Go Wrong?
There exist many factors to consider before deciding on bankruptcy. Unfortunately, if not evaluated properly, the borrower can get more debt. This consequence can happen if the debtor files for Chapter 13 bankruptcy and he/she owes other loans with higher priority than student debt. Besides, a bankruptcy filing is an expensive process. If the court does not waive the fees, the borrowers will need to pay extra.
It is possible to get an attorney to guide you through the process. However, a debtor who can afford to pay the attorney will not probably meet the “undue hardship” condition. Overall, try to get a third-party expert help to decide if you really need to file bankruptcy or you can access other options.
What are your options if you just can’t pay your student loans?
Repayment of student loans can be exhausting. If you find yourself unable to pay your student loans because things get tough, here are several options for student loan repayment.
1. Alter your repayment plan
When you’re having trouble keeping up with your federal student loans, a further thing you should do is to alter your repayment plan. Many federal student loans are qualified for income-driven plans that cover your monthly payments from 10% to 20% of your income. There are several forms of repayment plans. Let’s take a closer look at a few of the possible options.
a) Graduated, extended and standard repayment plans
A graduated repayment plan will proceed with your payments with a lower amount, which will keep increasing. An extended payment plan allows you to select payments that can either be graduated or fixed.
The standard repayment plan will have a fixed monthly payment.
b) Income-driven repayment plans
There are also a few repayment plans that are called pay-as-you-earn which is also regarded as the PAYE and REPAYE plans usually end up pricing more than the regular 10-year repayment plan.
2. Search for consolidation
You might want to evaluate consolidation if you’re having trouble keeping up with various monthly payments. Federal student loan holders may qualify for a direct consolidation loan. It will consolidate your loans from one monthly payment or a single lender into one loan. There is no fee for the application. Most federal student loans are qualified for consolidation. Holders of private student loans are not qualified for a direct consolidation loan. Your new monthly payment may be lower than your current payments. Consolidation provides you up to 30 years to pay off your loan payments.
3. Look into Forbearance or Deferment
If you can not repay your student loans because of your economic challenges, you may be able to hold back your federal loans for up to three years. If you are not qualified for deferment, you may be qualified for deferment, which may cancel or lessen your payments for up to 12 months. Debtors must apply for forbearance and deferment. They should keep making payments until they are accepted. During forbearance, you are liable to pay interest on any and all forms of federal student loans. However, you may not be capable of paying interest on some forms of loans during the deferment period.
4. Consider Loan Forgiveness
A further option you might want to evaluate is loan forgiveness. With the Program of Public Service Loan Forgiveness, federal student borrowers involved in the public service may be granted their loans after 10 years of monthly payments.
Final Thoughts
Student loan repayment may be difficult, but if you are having a difficult time, some ways can help you. If you just couldn’t afford student loans now, the great option to do is get in touch with your loan servicer to answer any of your questions. Refusal to take action can adversely impact your financial situation and could result in default.
