How Will Student Loan Bankruptcy Affect My Credit Score
Unfortunately, student loan bankruptcy will ultimately carry with it some serious consequences, and will likely negatively affect your credit score. Even if bankruptcy seems like the best choice for you right now, you should still heavily consider the long-term repercussions that will impact your credit over the next several years. In the case of a Chapter 7 bankruptcy, it takes only about 90 days to forgive the debt tax-free. While the process may seem like its over, there is still more work to do to make up for the impending hit to your credit score.
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Building credit, especially for younger borrowers, is not easy when bad credit gets in the way of owning a credit card. You can find secured credit cards with lower annual fees and payment alerts. You are less likely to be denied a secured credit card than a standard credit card, so repairing your credit doesnt feel like an impossible goal.
Private Student Loans Can Now Be Discharged In Bankruptcy But Consider The Alternatives First
In July 2021, a federal court ruled that private student loans can be discharged in bankruptcy. But student loan refinancing may offer a better way to manage your college debt without significantly damaging your credit score.
Bankruptcy is a legal proceeding that provides financial relief for consumers who cannot repay their debt. Many types of debts can be forgiven in bankruptcy, including credit card debt and medical debt. But certain types of educational benefits, such as federal student loans, cannot be discharged in bankruptcy.
In previous bankruptcy cases, it was unclear whether private student loans were dischargeable loans until July 2021, when a federal court ruled that private student loans are not considered qualified higher education expenses under the U.S. Bankruptcy Code.
Discharging private loans in bankruptcy may provide much-needed respite for debtors who can’t meet their debt obligations, but bankruptcy has a lasting impact on an individual’s finances and credit score. It’s important to consider the alternatives before resorting to bankruptcy.
If you’re having trouble making your private student loan payment, then refinancing may be the answer. By refinancing your college debt to a lower rate, it may be possible to reduce your monthly payment so you can avoid defaulting on your loans.
Expected Changes In Bankruptcy Student Loans
In October 2022, the Federal Student Aid chief operating officer informed Congress that the Education Department is working on improving the conditions for bankruptcy cases. He mentioned that the current rules for bankruptcy on student loans are not acceptable, and the process does not work well.
Therefore, the Education Department is working on new solutions to improve the bankruptcy process. Meanwhile, the advocates recommended the Education Department support the borrowers rather than oppose them. Such a shift could help some borrowers to get bankruptcy on student loans.
Yet, there is still no exact decision on the new rules. However, the FSAs chief operating officers notes create positive expectations from the process.
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How To Get The Ball Rolling Not A Slam Dunk
Natalie wants readers to understand this is not a slam dunk. First, you need to find a bankruptcy attorney who is familiar with the undue hardship rules, as many are not.
It is important to understand that you will be filing for bankruptcy, and, as you are claiming an undue hardship, this will be decided in what is called, An Adversary Proceeding in bankruptcy court. This is a real lawsuit, as the creditor wants to be paid and you are trying to demonstrate why the loan should be forgiven.
You will appear before a judge who will most likely use the Brunner Test to decide if you have an undue hardship.
If you can prove all three of these elements, you are entitled to a discharge, but youve got a lot of work to do, beginning with conducting discovery.
Be prepared to provide financial records, tax returns, bank statements showing your financial resources, proof of expenses, housing, utilities, food, etc. You will need to present a detailed picture of your financial life.
She also wants readers to understand that not all student loans are Qualified Education Loans.
For example, a private bank making a loan where the amount exceeds the published cost of attendance might not be a qualified loan and therefore is dischargeable without having to show undue hardship.
Her website is well worth the time for anyone facing crushing student loan debt.
What Happens If Your Student Loans Aren’t Discharged
If, as in most cases, your loans are not discharged in bankruptcy, here’s what happens.
- Chapter 7 bankruptcy. In Chapter 7 bankruptcy, if payment of your loans is not an undue hardship, you’ll still owe them when your bankruptcy case is over.
- Chapter 13 bankruptcy. If you can’t discharge your student loans, Chapter 13 bankruptcy provides some other ways that can help. For example, you’ll likely be able to pay a reduced amount during your Chapter 13 planalthough you’ll be on the hook for whatever amount is left after your repayment period ends.
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Private Student Loan Bankruptcy: Everything You Need To Know
Bankruptcy offers protection from your creditors when you can’t afford to repay your debts. But discharging a private student loan in bankruptcy can be a tricky and often impossible process. Read on to learn how the process works now and how recent court cases and pending legislation in Congress might give overwhelmed student borrowers more solutions in the future.
Who You Need To Repay
You may have loans or lines of credit that you need to repay to the government and/or your financial institution.
In some provinces and territories, Canada Student Loans are issued separately by the federal and provincial or territorial governments. This means that you could have more than one loan to pay back.
Verify your contracts to determine where your debt comes from and where you need to repay it.
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What Alternatives Could Help Me Pay Off My Student Loan Debt Without Declaring Bankruptcy
Fortunately, there are alternative options to declaring bankruptcy.
For short-term solutions for federal student loans, deferring the loans or going into forbearance, could be options to consider if you qualify. These options allow borrowers to temporarily pause their student loan payments.
Unlike declaring bankruptcy, federal student loans in deferment or forbearance generally dont negatively affect your credit.
Another option for federal student loans is switching to an income-driven repayment plan, which ties your monthly payments to your discretionary income. If your income is low enough to meet the thresholds for these plans, this could bring payments down significantly, though interest will still continue to accrue.
Private student loan lenders may offer temporary assistance programs that could help borrowers who are struggling to make payments on a temporary basis.
It may also be worth negotiating: One option could be to contact the loan servicer or lender and ask for additional repayment options. In general, servicers or lenders would rather receive a smaller sum of money from you than nothing, so its typically in their best interest to work with you.
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Likelihood Of Discharging Student Loans
Why Is It So Difficult To Discharge Student Loans?
In 1976, Congress prohibited federally guaranteed student loans from being discharged in bankruptcy except under conditions of undue hardship. This was in response to largely unfounded fears of too many student debtors looking for an easy way out of their obligations.
This put student loan debt in the same category as financial obligations like child support, alimony and criminal fines.
In 2005, Congress added private student loans to the list of debts that cannot be discharged.
In most bankruptcy cases, consumers dont even attempt to have student loans discharged. Instead, their lawyers focus on other issues such as .
Austin said that less than 1% of bankruptcy filings include student loans, even when there is a compelling case. He cited a situation in which a single mother on a teachers salary and battling cancer didnt bother filing for bankruptcy, despite more than $150,000 in student loan debt.
However, in most cases, the legal hurdles that have to be overcome are so daunting that most lawyers advise their clients not to seek a discharge for student loan debt in their bankruptcy filing. Also, there are now several income-driven repayment plans such as Pay As Your Earn , Repay As You Earn , Income Contingent Repayment and Income Based Repayment that most borrowers should be able to find a program they can afford.
Surprisingly, about 40% of the cases that are filed, actually are successful.
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Bankruptcy Questions Answered: Can I File For Bankruptcy On Student Loans
More and more individuals are finding it difficult to both support themselves and pay off the debt that helped them get an education. Thisfriction leads many to wonder about student loan debt in bankruptcy what are the guidelines, and is it even possible? At Bates and Hausen, LLC our Northeast OhioBankruptcy Attorneys can help you tackle this common concern.
Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our loans reporters and editors focus on the points consumers care about most the different types of lending options, the best rates, the best lenders, how to pay off debt and more so you can feel confident when investing your money.
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Claiming Undue Hardship In A Student Loan Bankruptcy Case
A Chapter 7 bankruptcy alone will not wipe away your student loan debt. In order to stop collections altogether, you will have to file a petition for a determination of undue hardship. Claiming undue hardship means that repaying your loan is too difficult and too expensive like a weight that moves the scale from struggling to suffering. This determination will take place in an adversary proceeding in bankruptcy court.
There are three criteria you must meet to successfully claim undue hardship in a student loan bankruptcy case:
This three-step measurement is also known as the Brunner Test, and if all requirements are met, your lender will no longer be able to collect loan payments from you.
If the determination of undue hardship is unsuccessful, you can still apply for Chapter 13 bankruptcy, which allows the court, rather than the lender, to determine the monthly size of repayments. These payments will often be smaller and allow for more flexibility for several years until repayments return back to normal or the borrower petitions once again for undue hardship.
Criteria Based On The Educational
- The loan must have been borrowed to pay for the education of a student who is enrolled at an eligible educational institution. Eligible educational institutions are defined as Title IV colleges and universities. If the educational institution was not accredited or not eligible for U.S. federal student aid, the loan is not a qualified education loan.
Note that these criteria apply to the design of the loan, not necessarily to how the borrower chose to use the loan proceeds.
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Have You Considered Other Repayment And Forgiveness Options
Can you file bankruptcy on student loans? Maybe. Should you? That depends on your personal situation.
Filing bankruptcy on student loans is a complicated, intrusive and extensive process. In fact, Fuller advised not doing it at all if you can. It should be a last resort, he said.
There are many alternative solutions to filing bankruptcy on student loans. For example, federal loans come with options such as income-driven repayment plans and deferment or forbearance. These programs could provide relief without the extreme step of bankruptcy.
You also have the option to apply for forgiveness, either through an income-driven repayment plan or Public Service Loan Forgiveness . PSLF is available to those who work for certain public service organizations, such as government agencies or nonprofits.
And if you have private student loans, talk to your lender. They might have a hardship program for student loans that you didnt know about. Fuller suggested sending to your private loan servicer a letter via certified mail outlining your financial hardships, your income and how much youre able to pay. Your servicer may respond with a repayment plan that provides some relief. After all, you dont lose anything by asking.
Before filing bankruptcy on student loans and trying to fight against a system that makes it difficult to discharge your debt, be sure to research your other debt repayment options for student debt relief.
Andrew Pentis and Alli Romano contributed to this report.
Can I Discharge A Private Student Loan In Bankruptcy
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In a Nutshell
Private student loans are loans extended by private lenders that are not backed by the federal government. This article will cover the limited relief methods available for private student loans. The article will also discuss dischargeability challenges in a bankruptcy filing.
Written byAttorney John Coble.
Private student loans are loans extended by private lenders that are not backed by the federal government. These loans are only to be used for qualified educational expenses. Private student loans don’t have many of the relief provisions allowed for by federal student loans. There are rarely any income-based repayments, forbearances, and deferments made available when debtors repay these loans. This article will cover the limited relief methods available for private student loans. The article will also discuss dischargeability challenges in a bankruptcy filing.
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How To Prepare For Bankruptcy On A Student Loan
Bankruptcy in all cases is never an easy process and in case of a default on student loan, it is more so. And the only point that you can cling to is to prove undue hardship. This means proving your inability to repay your federal student loan.
This throws the ball in the judges court, who may interpret your eligibility on his or her own terms. Courts usually go for The Brunner Test in evaluating hardship that can be had from the Federal Student Aid office of the US Department of Education.
Some important points enumerated in The Brunner Test are:
- Repaying your federal student loan does not allow you to maintain a basic standard of living.
- That such hardship will last for most of the duration of the repayment period.
- That you unscrupulously tried to repay your federal student loan up till now.
Although these points may sound easy to prove, but showing extreme hardship never quite convinces the judge. And if you do prove it successfully, the bankruptcy filed by you may not be fully discharged. It may be partially discharged or restructured. In the latter case, new payment terms are drawn to make it easier for you to repay.
What are the steps to follow in student loan bankruptcy case?
How Bankruptcy Affects Student Loans
As shown in this graph from the Federal Reserve Economic Database student loan debt has been going up steadily since 2006. As of the second quarter of 2020, outstanding student debt added up to $1.54 trillion.
An interactive version can be found at this link. In part, this is because the cost of higher education has been increasing steadily. But, the perceived inability of student loan borrowers to discharge this type of debt in bankruptcy hasnât helped.
A bankruptcy filing can discharge federal student loans, but only if the bankruptcy judge finds that it would be an undue hardship for the borrower not to do so. Under current bankruptcy laws, this requires the person filing bankruptcy to bring an adversary proceeding.
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What Is Refinancing Student Loans
The benefits of student loan refinancing are different for everyone. How much refinancing can help you will depend on your existing loans and your current financial situation. This article covers what student loan refinancing is and how it works. Youâll also learn how to determine whether refinancing is right for you and how to compare lenders to maximize your benefits.
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Seven Year Rule Or Waiting Period
Section 178 of the Bankruptcy & Insolvency Act in Canada specifically excludes government guaranteed student loans if you have been a full or part-time student any time in the past seven years. To put it simply, if you have been out of school for more than seven years your student loan debt will be eliminated if:
- you or
- if you make a debt proposal to your creditors through a consumer proposal.
If it has been less than seven years since you were a student, your government guaranteed student loan will not be automatically discharged through a bankruptcy or a consumer proposal.
If you have been out of school for 7 years your student loans are eliminated when you claim bankruptcy. You are no longer obligated to pay your student loans. If you have not been out of school for 7 years, you can stop making payments during your bankruptcy or proposal but will be required to start making payments again once you are discharged.
What if I have more debts than just my student loans? If you have other significant debts like credit card debts, lines of credit or payday loans, a bankruptcy or consumer may still be a good option even if you dont meet the waiting period. Filing bankruptcy can help clear other debts and make repaying your student loan more manageable. We know this can be confusing. Our Licensed Insolvency Trustees will discuss the treatment of your specific student loans during your free consultation before you file.
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