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Dealing with Student Loan Debt and Bankruptcy

Upon graduating from college or Grad School, if you are like a lot of others these days, you are probably in a lot of student loan debt. At first, it may seem fairly manageable. But, you could also wind up declaring bankruptcy a couple of years later. Here is the key so that won’t happen to you.

Farewell to Loans

Student Loan DebtYou can’t just wave a magic wand and make your student loan debt go away. Declaring bankruptcy usually means that your debt is simply restructured. It’s important to realize that even though you have declared bankruptcy, you might not be able to get rid of all your student loans. There are two types of bankruptcy for individuals named for their respective chapters in the United States Bankruptcy Code. They are Chapter 7 and Chapter 13.

Chapter 7 bankruptcy is a liquidation bankruptcy, which means that they sell off all your assets so that the debts can be repaid as much as possible. You are often allowed to keep your house and car and that is about it. This type of bankruptcy is designed to help people who are so far in over their heads that they will never be able to get out. You can’t file for chapter 7 bankrupcy if you have already filed within the last 7 years.

In a Chapter 13 bankruptcy you get to keep your assets and the court helps you work out a payment plan to pay off your creditors. Generally this is a three to five-year repayment plan. The court may discharge some portion of the debt depending on the how much income you have.

Don’t Default on Your Student Loan!

When you default on your loan, you basically just stop paying it without giving notice to the provider. This can cause you to accrue a ton of interest while the loan is just sitting there, and you will almost certainly have seriously affected your credit scores. As you will see from the following forbearance and deferment sections, you do not have to let the loan situation get to this point. Options do exist for individuals who cannot pay their loans, so you need to call the loan provider before making any moves.

Forbearance and Deferment

These are two terms that you must understand when you’re in a difficult spot with your loans. They provide a much better solution than bankrupcy or default. A deferment is a period during which repayment of the principal and interest of your loan is temporarily delayed. According to the Federal Student Aid website, you could qualify for a deferment if you are in certain educational programs (i.e. Grad school, etc.), unemployed or meeting the stipulations for an economic hardship situation.  Essentially, you would not have to pay your loan back for a certain amount of time. Interest rates may or may not continue to be added onto your loan. You must speak with a federal student aid adviser to determine the specifics of your situation.

In a forebearance, if you can’t make your loan payments, but don’t qualify for a deferment, your loan servicer may be able to grant you a forbearance. With forbearance, you may be able to reduce your monthly payment or even stop paying for up to 12 months but interest will continue to add up on your loans.

The Future

Bankruptcy and problems with paying your student loans can seriously affect your financial future. You might wind up paying back these sums of money for years or even decades. As a result, you’ll have less money to save and less funds for yourself. Additionally, these issues can hurt your credit score. A low credit score may prevent you from obtaining a loan for a house or a car, and force you to pay higher interest rates even if you can qualify for a loan and bankruptcy can even further contribute to this issue.

Before you declare bankruptcy or simply stop paying your student loans, find out if any other possibilities exist. For example, calling the credit card agencies and student loan companies might leave you with smaller and easier-to-handle monthly payments. Find out what all of your options are before you leap into the wrong one.

 

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