Article from Andy at Penny Less Dad: Andy is an editor with Penny Less Dad and contributes specifically on personal finance topics.You can reach him at firstname.lastname@example.org or follow him on Google+.
If you are reading this article, I assume you are suffering from student loan debt and are searching for a way out.
If so, I guess you’re in the right place!
Before we try to help you remedy your student debt problems, you need to understand that everyone’s student debt situation is different. For example, the types of loans you have can impact your repayment options, as well as your employment and income status.
In order to come out with the best options for your particular situation, it’s extremely important that you understand all of your loan details.
Although bankruptcy should be viewed as a last resort, it is useful – and sometimes it can really help.
How can bankruptcy help?
You can get protection under bankruptcy if you have a federal student loan with a wage garnishment or social security offset. Once you file for protection under bankruptcy, garnishments, and federal benefits offset stop immediately. Unfortunately, the garnishment or offset can start all over again if you don’t end your default status by the completion of your bankruptcy.
The bankruptcy filing also protects any co-signer on your student loan (whether a family member or friend) from collection activities.
Does bankruptcy hurt?
A default provision is found in many private student loan promissory notes in case a bankruptcy is filed by either the signer or co-signer. Sometimes the co-signer files for relief under bankruptcy even when the borrower is current on his/her monthly payments, and that results in a default against the signer.
There is a debate on the question of the legality of such a filing, but no final conclusion has been determined yet. Answers may vary from location to location, so understanding state laws is an important step in the process.
When is bankruptcy pointless?
Mostly, student loans are not dischargeable in bankruptcy if there is no undue hardship. Unfortunately, this is something that is very difficult to prove, and often expensive. However, this should not discourage you. While there are certain situations when hardships can be easily demonstrated, a discharge in bankruptcy is often the most difficult thing to achieve. Nevertheless, things can turn to your favor if you can show something like permanent disability.
A federal student loan can easily be discharged in an administrative procedure if the person qualifies for undue hardship because of disability.
Yes, there is an administrative discharge available for totally and permanently disabled student loan borrowers.
If you fulfill the criteria, you will need to fill out some paperwork, send in supporting evidence, and you would get a decision after 60 days. What is more interesting, it’s absolutely free compared to regular bankruptcy filings that take years to complete and cost large amounts of money.
However, while a bankruptcy discharge is tax-free, you’d need to pay taxes on administrative discharge. That might still be cheaper, quicker and less complicated to the whole bankruptcy procedure.
Affordable payment plans :
Bankruptcy might be useless for you if you are going to discharge a student loan just because the payment seemed exorbitant to you. There are many federal student loan borrowers who know nothing about affordable payments based on income.
Yes, it’s possible to get affordable payment plans if you are going through hardships. Imagine such a situation when you are requesting the bankruptcy judge for a discharge due to hardships and the attorney of the creditor shows the judge that you can have a small payment plan of $5 or $10 a month.
There are many reasons people file bankruptcy. My point is, see if there is a real hardship and you actually need a discharge, or if you’re filing a bankruptcy forcefully. Check with your attorney to know how it will impact your student loans.