Every year, somewhere around a million Americans file bankruptcy. The number is somewhat fluid, as some bankruptcies are personal and others are business. However, a million is still quite a large number of people who no longer feel they can handle their debt.
There are, as you might know, certain debts which can be included in a bankruptcy. Similarly, there are debts which under no circumstances may be included. So what about bankruptcy and student loans? Can your college debt be incorporated into your bankruptcy?
Bankruptcy: What You Can and Can’t Include
If you’re considering filing for bankruptcy, it’s important that you take a careful look at your finances. Gather together your bills and statements of debt, then sit down and determine what can and cannot be included.
There are some debts which may never be rolled into a bankruptcy. Child support and alimony, for instance, can’t be included. Back taxes also may not be discharged. You can include your car note in your bankruptcy – but not if you want to keep your car. Home loans and liens aren’t allowed, and neither are court costs.
However, student loans are sort of sticky. In some cases, you may be allowed to include your college debt in your bankruptcy. In other cases, the court will rule that you’re still responsible for your student loans.
Are you considering bankruptcy but unsure as to whether your debt may be discharged? While the rules aren’t set in stone, there are a few things you need to know about bankruptcy and student loans.
Bankruptcy and Student Loans
Student loans are extremely difficult to discharge in a bankruptcy. In fact, most people are under the assumption that it’s impossible to do so. That’s not necessarily true. Sometimes you can have your college loans included in a bankruptcy. You’ll just need to prove that you can’t pay them.
To have your student loans discharged, you’ll need to prove to the court that paying those debts will cause undue hardship for you and your family, if you have one. What that means is that, were you to pay your monthly student loan bill, it would cause your standard of living to drop below a certain point.
You’ll also have to prove that that financial hardship would last for most of the repayment period. In other words, if you’re looking at brighter financial days ahead, you’ll likely not be able to discharge your student loans in a bankruptcy.
Finally, you’ll have to prove that you tried to repay the student loan debt. If you graduated college six years ago and only made a handful of payments, you’re not likely to have your student loan debt discharged.
Ultimately, the court will decide. It’s a good idea, in the meantime, to hire an attorney to help you navigate the legal waters.
Bankruptcy on Private Student Loans
There’s little difference between public and private student loans when it comes to filing bankruptcy. You can file for undue hardship on a private student loan in the same way you can with a public loan.
However, sometimes there are other options. Many graduates who have a lot of student loan debt attempt to work with the private lender to come up with a new plan for payment. In most cases, this is a consolidation of student loan debt.
If student loan debt is your only debt, there are steps you can take before you file bankruptcy. The first is to talk to the lender and see if you qualify for a hardship deferment. If you’ve just graduated, for example, you may not yet be employed. Your lender will generally offer an option for a 12 month deferment, delaying the repayment of your loan.
A hardship deferment has the benefit of the principal not accruing interest, in most cases. When you resume your monthly loan payments, your loan balance will be exactly as it was when you paused payments.
Forbearance is a little different. Many lenders, both public and private, offer forbearance options. You’ll still receive a grace period on your loan, usually around a year. However, during that year you’ll be responsible for interest on your loan.
How to File Bankruptcy for Student Loans
Most people who choose to file bankruptcy do so with the assistance of an attorney. That’s true whether student loans are included in the debts or not. But if you’ve got student loan debt, a lawyer is certainly a good idea.
Is it possible to have student loan debt discharged on your own? Sure. Is it much, much easier with a lawyer? Definitely.
Student loan debt carries with it the implication that you’ll get a better, higher paying job as a result of that debt. That said, a judge may be inclined to tell you to go do so. A lawyer can help you formulate your defense, and to prove that the loan hardships will last.
When you hire an attorney, do so only after researching the firm thoroughly. Find a law firm that specializes in finance and bankruptcy. Ask around for recommendations, and check with your state’s Bar Association for any problems the lawyer may have run into. Of course, you’ll also want to be sure the attorney is licensed to practice in your state.
Once you’ve vetted your attorney, it’s imperative that you tell him or her everything about your finances. Leave nothing out – not even that Netflix bill.
Your lawyer is there to help you and withholding information may cause detrimental results when you appear in court. If the judge finds out about that side gig you’ve had for three years, but you didn’t disclose this to your lawyer, it won’t look good for your case.
You can get rid of your student loan debt with bankruptcy. However, you’ve got other options. Should you speak with your lender and determine forbearance or deferment isn’t for you, a good attorney can help you discharge your student loans.
If you still have some questions that you need answering, take a look at our other guides to student loans and student loan debts. We have guides on Student Loan Forgiveness, Student Loan Debt Relief, Tips to Get Out of Debt and more. Bankruptcy may seem like an easy way out, but as discuss in Things That Can Hurt Your Credit Score, you will be placing a big red mark on your credit report for the next decade and that can be hard to deal with.