It is fairly well known these days that student loans are very difficult to discharge in a bankruptcy due to the requirement to prove “undue hardship.” Unless you are in dire financial straits, with a “certainty of hopelessness,” that student loan isn’t going anywhere.
But what if the student loan isn’t the problem? What if you are current on your payments, but are just having difficulty making them because of your credit card debt obligations? If your bankruptcy is simply to wipe out that credit card debt to clear your decks financially for those student loan payments, you need to be careful.
How Bankruptcy Affects Current Student Loans
When you file bankruptcy with current student loans (the monthly payment is in your budget), what happens to those loans can differ depending on the type. Are they private loans or through the U.S. Department of Education? Knowing this should be part of your bankruptcy preparation, as it will affect how you handle those loans going forward.
Private Student Loans
If you have private student loans, read the loan notes carefully before you file. Examine thoroughly the definition of the term “Default.” Does the definition include the filing of bankruptcy? If so, filing could put you in default even if you are current on your payments! This can cause problems not only for you, but your cosigner as well.
Even if bankruptcy is not an instance of default, you could end up there without proper preparation. The filing of the bankruptcy institutes something called an “automatic stay” to prevent creditors from trying to collect debts from you.
This can stop automatic payments from your bank or cause the loan bank to stop accepting your payments. Thus, if you are not paying attention, you could go into default without realizing it.
Federal Student Loans
Federal loans do not have default clauses that include bankruptcy, but the cessation of automatic payments can still be an issue. All creditors are subject to the automatic stay, including the government, so you need to be aware of this,so as not to get behind.
If you file a chapter 13, this can cause some other complications. Student loan debt is no different than credit card debt, and the bankruptcy trustee may well require that you pay it the same as you would any other debt: through your plan.
But what if your plan does not propose to pay creditors 100%? Then you could come out of your plan three to five years later in default!
Needless to say, you need to tread carefully in bankruptcy if you have current student loans. You should not try to file it yourself, and should hire an attorney who is familiar with student loan law.
So What Do I Do?
If you live in Burlington, Camden, Gloucester, Salem or Cumberland County, are considering filing bankruptcy, and are ready to take action, call my office at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case. Let my knowledge of student loan law be of assistance to you in navigating these waters.
If you are looking for more information about bankruptcy, then download my free book, Top Questions People Ask About Filing Bankruptcy in New Jersey.
Not sure if bankruptcy is right for you? Take the quiz to the right to find out more!