For many graduates, paying off student loans is the first financial task that they face, and often the most daunting. Even if one is employed, starting salaries can be low and it is easy to quickly fall behind on monthly loan payments. This problem can grow over time as loans are easily deferred through the agencies that service student loans, but the balance will remain and interest will accumulate for years. A single five year deferment of a $10,000 loan at the current 6.8% interest rate will add over $3400 to the balance owed, a substantial increase that does not solve the problem of repayment.
Will Bankruptcy Dissolve My Student Loan Debt?
At some point, one may look at alternatives to repayment just to relieve the financial pressure, and bankruptcy is one of those options often considered. However, student loan debt is not one of the categories of debt that can be dissolved by filing bankruptcy. Since 1976, student loans have been classified as exempt from bankruptcy protection, with substantial collection powers given to government agencies in the case of default. Although there have been a few cases where student loan debtors were allowed by the courts to include that debt in a bankruptcy, those situations are uncommon. In each case, the debtor was able to show a level of undue hardship that persuaded the court that an exception could be made, but in one case it took 10 years to receive a favorable ruling.
Assuming that you are not facing extreme economic hardship, how can bankruptcy help you pay off your student loans? Usually, student loans are not the only debt one carries, and you may have credit cards, personal loans or medical debt as well. These areas are all covered by the bankruptcy law and can be discharged under Chapter 7, or reorganized under Chapter 13 with a payment plan. Given this fact, there is an opportunity to adjust your finances and place a priority on paying your student loans, while discharging other types of debt in bankruptcy.
Filing Chapter 7 Bankruptcy
If you choose to file Chapter 7, your student loans will be listed on the bankruptcy filing, but will not be discharged with the rest of your debt. However, if you had significant debt payments of other types, you may be able to take the money previously paid monthly to those creditors and apply it now to your student loan payments. For example, if you were paying $500 a month on credit card bills, discharging that debt will allow you to use that $500 toward reducing your student loan balance.
Under a Chapter 13 filing, the student loan debt would be grouped together with the other listed debts, and included in the payment plan set up by the court. At least in this case the debt is under the jurisdiction of the bankruptcy court and is given equal treatment with other debts for repayment. In some cases, you may be allowed by the court to allocate more of the payment to the student loan debt.
Filing bankruptcy to reallocate money to student loans can be a sound financial strategy, and is a valid part of the ‘fresh start’ policy that lies behind the bankruptcy laws. For some, it may open the door to creating financial balance for the future. Call the Law Firm Of Joel M. Aresty, PA today to learn more about bankruptcy and student loans.