Your house. A business you started. That car that you love. Your wedding ring. Medical bills associated with a catastrophic event. These are all things that you can file for bankruptcy. However, if you’ve ever asked yourself “Can I file for bankruptcy on student loans?” the simple answer is “No”.
How does bankruptcy work in the US?
Bankruptcy is a legal procedure that permits businesses and individuals to begin afresh by discharging all or some of their unsecured debts. The major types are Chapter 7, Chapter 11 & Chapter 13. There are other types (Chapter 12), but for the understanding of how they work with student loans, we’ll stick with these three major types.
This is what most people think of when they think of filing for bankruptcy. When Chapter 7 is filed, a trustee is appointed by the court to determine which assets will need to be sold and which creditors to pay off in what order. When the trustee has sold as many assets as possible, the court will “discharge the remaining debt”. This basically means that the debtor will no longer be legally obligated to pay the incurred debt. In 2005, the US Congress passed a law making it more difficult to get into Chapter 7 bankruptcy. If your income is over a certain threshold, you will more than likely have to file for Chapter 13 or you are not allowed to declare bankruptcy at all. Chapter 7 can be filed by individuals or businesses alike.
Chapter 13 can be thought of more as repayment bankruptcy versus discharge. The debtor and the trustee work out a plan where the debtor pays off the debt between 3-5 years. The debtor may sell assets, work for income or continue whatever business the debtor had in order to meet the financial repayment plan. The main requirement is that the plan must be feasible (although that type of subjective standard leaves a lot of discretion to the bankruptcy judge). Chapter 13 can only be filed by individuals.
Chapter 11 is mostly for businesses. However, there are cases where the extremely wealthy may also have to file Chapter 11 instead of Chapter 7. Similar to Chapter 13, Chapter 11 makes the debtor must come up with a repayment plan. Unlike Chapter 13 though, the plan must be approved by creditors vote (all of them – let me repeat that – all of them). In Chapter 11, the debtor is also now the trustee. That means that many of the decisions of who and what to pay as well as when solely falls on the decision of the debtor (though it has to be approved by creditors). The judge still retains power over the debtor in Chapter 13.
Be aware if you do decide to file bankruptcy, your credit score will probably drop significantly after defaulting on financing.
Can I file for bankruptcy on student loans?
Student loans are a necessity to secondary education for millions of students. These very loans that have helped drive education and economic growth for the country are some of the strictest loans for borrowers. If you know anyone who has tried to rid themselves of student loans through bankruptcy, they will probably tell you that you have a better chance of hitting the jackpot lottery. While there are dozens of methods that BYE Student Loans can teach you to forgive, delay, cancel, or accelerate repayment on student loans, eliminating your loan through bankruptcy is nearly impossible. In order to do this in a court of law, students must prove that they endured ‘undue hardship,’ a bar set so high that almost no one has been successful.
One ironic sympathizer to bankrupt student loan holders is President Trump himself, who has employed legal bankruptcy tactics within his businesses in the past to ultimately benefit his company. This same latitude that is allowed in the business world has no merit for student loan holder. As a result, the Trump administration has announced that they plan to address this dilemma, by loosening the definition and interpretation of ‘undue hardship.’ While details need to still be finalized, this would be a win for all student loan holders that have come across troubled financial times and need to employ bankruptcy. While this still would not be a good situation for anyone going through bankruptcy, it would be slightly better than the current scenario. After all, why would we not allow our student and future leaders to use the same bankruptcy laws that large multinational companies can employ?
Remember, despite these potential changes, bankruptcy on a whole would be a bad situation for any individual and should be employed only as an absolute last result. BYE Student Loan Debt can help you determine a plethora of options (forbearance, extended repayment, forgiveness, etc) to avoid this scenario and save money or time on your student loan repayments!