Did you know that in the US, outstanding student debt surpassed $1.7 trillion in 2021? For many people, student debt is a heavy burden that can feel impossible to overcome. If you’re struggling with student loan payments and considering your options, declaring bankruptcy might be a solution worth considering.
In this article, we’ll guide you through the process of bankruptcy and how it can help with student debt, as well as what to expect after filing and how to rebuild your financial life.
The Bankruptcy Process
Declaring bankruptcy is a serious decision that can have lasting effects on your financial life. However, it can also provide relief for certain kinds of debt, including student loans, in some cases. In this section, we’ll go over the main steps in the bankruptcy process to help you better understand how it works.
Types of Bankruptcy: Chapter 7 and Chapter 13
There are two main types of bankruptcy that individuals can file: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is also called “liquidation” because it involves selling some of your assets to pay off your debts. Chapter 13 bankruptcy is known as “reorganization” because it allows you to create a plan to repay your debts over time.
Eligibility for Bankruptcy
To be eligible for bankruptcy, you must meet certain requirements. These vary depending on the type of bankruptcy you are filing.
For example, to file for Chapter 7 bankruptcy, you must pass a “means test” to show that you cannot afford to pay your debts. To file for Chapter 13 bankruptcy, you must have a steady income to create a repayment plan.
The Process of Filing for Bankruptcy
Filing for bankruptcy can be a complex process. It is important to follow a bankruptcy guide or work with a lawyer to make sure you complete all the necessary steps. The process usually starts with credit counseling and gathering financial documents.
Next, you will file a bankruptcy petition with the court, which includes listing all your debts, assets, and income. After filing, there will be a meeting with your creditors and a bankruptcy trustee. The court will then decide whether to approve your bankruptcy plan or not.
Consequences of Declaring Bankruptcy
Bankruptcy can have serious consequences on your financial life. It will stay on your credit report for up to 10 years, making it harder to get new credit, loans, or even a job. However, it can also provide relief from your debts and give you a chance to rebuild your finances.
Student Debt and Bankruptcy
Student loans are a unique kind of debt because they are not always dischargeable in bankruptcy.
In the past, student loans were easier to discharge in bankruptcy. Unfortunately, laws have changed over time, making it more difficult to get rid of student debt through bankruptcy. Today, you must meet certain requirements to have your loans discharged in bankruptcy.
The ‘Undue Hardship’ Standard
To discharge your student loans in bankruptcy, you must show that paying them would cause “undue hardship.” This means that you cannot maintain a minimal standard of living if you have to pay your student loans.
To prove undue hardship, you will need to pass a test used by the courts called the “Brunner test.” This test looks at three factors:
- Your current income and expenses
- The likelihood that your financial situation will improve in the future
- Your good faith efforts to repay your loans
Factors to Consider When Filing for Bankruptcy
Before you decide to declare bankruptcy, it’s important to think about your specific situation. You need to understand your options and consider the pros and cons of filing for bankruptcy.
Assessing Your Financial Situation
First, take a close look at your finances. Figure out how much you owe in student loans and other debts.
Also, consider your income and living expenses. This will help you understand if bankruptcy is the right choice for you or if there are other options you should explore.
Exploring Alternative Options for Student Loan Relief
Bankruptcy should be a last resort, so make sure you explore other ways to manage your student debt. There are programs like income-driven repayment plans, loan consolidation, or even loan forgiveness for certain careers. These options can help lower your monthly payments and make it easier to handle your student loans.
Weighing the Pros and Cons of Declaring Bankruptcy
Bankruptcy can help you get rid of your debts, but it also comes with consequences. It can harm your credit score and make it difficult to get loans or credit cards in the future. You should weigh the benefits of declaring bankruptcy against the potential drawbacks before making a decision.
Consulting with a Bankruptcy Attorney or Financial Advisor
If you’re unsure about whether bankruptcy is the right choice for you, consider speaking with a bankruptcy attorney or financial advisor. They can help you understand the process, evaluate your financial situation, and guide you toward the best decision for your unique circumstances.
Navigating Post-Bankruptcy Life
After declaring bankruptcy, it’s important to focus on rebuilding your finances and credit. This section will provide you with some tips and resources to help you get back on track.
Rebuilding Your Credit
Bankruptcy will have a negative impact on your credit, but you can work to rebuild it over time. Start by paying your bills on time and using credit responsibly. You can also consider getting a secured credit card or a credit-builder loan to help improve your credit score.
Establishing a Budget and Managing Finances
To avoid future financial problems, create a budget to manage your money. Track your income and expenses, and make sure you’re living within your means. Prioritize paying off any remaining debts and start building an emergency fund to protect yourself from unexpected expenses.
Pursuing Student Loan Forgiveness or Income-Driven Repayment Plans
If you still have student loans after bankruptcy, explore options like student loan forgiveness or income-driven repayment plans. These programs can help lower your monthly payments and, in some cases, even forgive the remaining balance of your loans after a certain period of time.
Finding Resources and Support for Financial Recovery
Recovering from bankruptcy can be challenging, but there are resources available to help you. Look for local support groups, nonprofit organizations, or government programs that offer financial education and counseling. These resources can help you learn how to manage your money and make better financial decisions in the future.
A New Beginning: Overcoming Student Debt Through Bankruptcy
Declaring bankruptcy can be a viable option for dealing with overwhelming student debt. Although it’s a complex process with potential consequences, it can also provide much-needed relief and a chance to rebuild your financial future.
At Husker Law, we provide fast and effective bankruptcy representation, ensuring your assets and interests are protected throughout the process. If you’re considering bankruptcy to help with your student debt, we’re here to help. Schedule a consultation by calling us at (402) 415-2525 or by reaching out online today!
