Federal student loans have been exempt from bankruptcy discharge since 1978. A change in the law in 2005 gave private student loans the same protection. The “protection” that student loans are offered in this legislation means that student loan debt will often survive bankruptcy proceedings while other types of debt do not. However, some school loans are partially dischargeable in bankruptcy, but if not, the borrowers will still be required to repay them after the bankruptcy.
Furthermore, bankruptcy can bring an opportunity to argue and thus negotiate the debt during the bankruptcy. The private student loans, and even sometimes the federal student loans, will often not reappear on your credit report after the bankruptcy.
Yet many bankruptcy petitioners who are struggling with student loans find bankruptcy helpful in that it allows them to free themselves of their other debt and devote available resources to student loan debt repayment. If your monthly payments for debts owed regularly exceed your income, you are forced to default by an inability to pay and you may consider filing bankruptcy.
If you are in default and your credit has already been damaged by an inability to cover your expenses each month, bankruptcy may be the obvious answer. Consistent default damages a consumer’s credit worse than a bankruptcy, therefore, by ripping the band aid off, you set yourself to wipe it all out at once and get that fresh start you need. In this situation, most will find it beneficial to file as bankruptcy is the surest way to repair future credit.
While bankruptcy is damaging to your credit and continues to mark the credit report for 7-10 years depending on which type of bankruptcy you file, it reports for disclosure purposes only and filers can easily have a credit score over 700 within one year or less after a discharge. That means that consumers considering filing need to weigh the consequences against the benefits. If you are not sure whether or not the benefits of bankruptcy will outweigh the consequences, ask yourself the following questions:
- How much is your debt? Is the amount of debt eligible for discharge an affordable amount to repay?
- Will you be seeking financing for a home or vehicle purchase in the next year following the bankruptcy? While it is possible to repair your credit after bankruptcy, and many find that filing bankruptcy may result in a better credit score immediately after the discharge than they had while struggling with overwhelming balances and past due payments, the bankruptcy will still show on the credit report for potential lenders. However, lenders now have mortgage programs as quickly as one year out of bankruptcy.
- Do you have other options? If paying off your debt is possible, then you may want to refocus your efforts on paying the debt off instead of seeking a discharge of debt. But if you can save that money that you would have spent in paying off that debt and you can rebuild your credit quickly, then bankruptcy may be for you.
If you decide to file, consult an experienced bankruptcy attorney at Aronow Law PC. We can help you decide which type of bankruptcy to file depending on your circumstances.