Filing for bankruptcy is one of the most difficult decisions you can make, but also one of the most necessary. The procedure is always slow and complicated, but when it comes to bankruptcy for student loans, there are several considerations to take into account before even starting the process.
First, you should be aware that filing for bankruptcy could negatively affect your financial situation in the years to come. Furthermore, it is not always possible to discharge a student debt, and when you do, it is not always the entire debt.
If you are still determined to file for bankruptcy, you can do so under Chapter 7 or Chapter 13. In either chapter, the court will appoint a trustee to confirm your debts to your creditors. Each has its pros and cons, which we summarize below.
Filing for Chapter 7 Bankruptcy
Once all your debts are confirmed, including your student loan, the trustee will liquidate all your non-exempt assets and use the proceeds to pay off as much of your debt as possible to your creditors. The rest of the debt is discharged by the court.
To file for Chapter 7, your income must be below the median income for your state, and you must pass a means test. Additionally, you must not have filed for another Chapter 7 bankruptcy in the past eight years.
Filing for Chapter 13 Bankruptcy
One of the most difficult requirements to pass for Chapter 7 is the means test. If you fail this requirement, you can file for Chapter 13. This will also help you keep your home in case of foreclosure.
If the court approves your application, the trustee will create a payment plan that will use up to 100% of your disposable income to pay off your debts over three to five years. The trustee collects the payment and distributes it to your creditors according to the payment plan.
Other Considerations to Keep in Mind
It is very difficult to get your debt discharged if your only debt is your student loan. However, if you have other debts, the court will decide how much you must pay each one each month. If you have a debt that has a higher priority than your student loan, the latter will receive a lower payment, accruing interest.
The court will not accept a bankruptcy declaration for federal student loans, since there are government programs that help you pay off your debt. Finally, keep in mind that you will probably have to pay filing fees, unless the court waives them.