If you're drowning in debt, you may be wondering whether bankruptcy is an option. But what if you have student loans? It's common knowledge that student loans cannot be discharged in bankruptcy, so is there even a point to declaring bankruptcy if the majority of your debt is from student loans?
Actually, bankruptcy can help, but there are a few things that you should know first.
Student Loans Can Be Discharged in Bankruptcy
The first thing you should know is that it is possible to discharge a student loan during bankruptcy. It's very rare, but if you can show that the student loan is a hardship and that you will not be able to pay it back, you can discharge it.
This does mean that you need to show that you simply aren't making enough money to pay off the student loan. And again, it's rare, but it's possible. However, it also does need to be specifically requested.
The requirements for discharging a student loan with bankruptcy include: being unable to maintain a basic standard of living, suffering undue hardship for a significant portion of time, and having attempted to repay the student loans in the past.
You Can Restructure Your Student Loans
Even if your student loans cannot be discharged, they can be restructured. A chapter 13 bankruptcy doesn't discharge your debts; instead, it negotiates them to have lower interest rates or longer repayment periods. If you're not attempting to dissolve your loans, but instead attempting to get on a repayment plan, a bankruptcy can help you adjust the installment payments of your loans to match your income.
Sometimes you don't need to discharge your loans; you just need to lower your monthly payments. Though the loan will take longer to pay off, you'll still be able to pay it off eventually, and in the meantime, your student loans won't be hurting your credit.
Of course, it's also possible to restructure your loans through a personal consolidation loan rather than through a bankruptcy. Personal loan consolidation involves paying off all of your debts with a single loan, such as a home equity loan, to get a better interest rate.
The advantage of filing bankruptcy over a consolidation loan is that a bankruptcy will offer three to five years of protection from creditors so you can pay off your debts slowly over time. Though your credit rating will temporarily suffer, it will eventually recover.
A debt consolidation loan can also be difficult to get if your income is low or your credit score is already down. A bankruptcy consolidation can help restructure your debts even if your current financial situation is quite dire.
Even If You Can't Discharge, Filing Can Still Help
It may not be your student loans that need to be discharged or restructured. Even if you can't do anything with your student loans, reducing your other debts can help. If you are able to discharge your credit cards, personal loans, and other debts, then your student loans may become much easier to pay off.
Most debts other than student loans can be discharged through bankruptcy. It's important to go over your budget early on to identify how much of your monthly income is going to your student loans specifically and how much of your money is going towards your other bills. This will tell you how to prioritize.
Whether or not your student loans can be discharged or modified (and whether or not a bankruptcy is a good idea) is really highly dependent on your own personal financial situation. Before you get started, contact Terry E. Hurst, Attorney at Law.