When speaking of personal bankruptcies we often come up with terms like "credit card bankruptcy" as a means of expressing what the major cause of financial failure was. One of those types of bankruptcies is known as a "student loan bankruptcy." Someone in this situation finds themselves so overwhelmed with student loans that they are unable to pay them back in a timely manner. With the growing cost of college education it's becoming more common than you think.
According to recent estimates an individual pursuing a typical four year degree at a mid-level institution can incur total student loans ranging between $50,000 and $75,000. Students going on for six or eight year degrees to be doctors, lawyers, and other professionals can graduate with several hundred thousand dollars in loans hanging over their heads. These loans must be repaid, just like a mortgage or an auto loan, with a monthly payment and on a routine schedule.
The Catch-22
Despite having several different options for filing bankruptcy, one thing is common among all of them: there are such things as dischargeable and nondischargeable debts. Where individuals are concerned, one of the types of debts considered nondischargeable are student loans. That means if the majority of your financial difficulties are due to excessive student loans, you're unlikely to find much relief through filing bankruptcy. About the only thing bankruptcy will do for you is keep your other creditors at bay so you can concentrate on your student loans.
Fortunately, student loans are structured in such a way that you can renegotiate your payment terms if you have trouble making monthly payments. While lenders don't advertise this, you could really take your entire life to repay your student loans just as long as they are paid. That said there are some things you can do to prevent a student loan bankruptcy.
Carefully Assess Your Needs and Desires
Before ever going off to college, students should be sitting down with a financial planner and a student aid official to determine exactly how much an education costs. The student aid official is more or less the one who will give you the raw numbers, while a financial planner will help you understand the viability of accruing so much debt. Only armed with this information can a student go forward in making a rational decision.
Next students must decide on a career path and a way to get there. Using nursing for example, an individual may want to be a registered nurse or a licensed practical nurse. Both types require extensive education and licensing that could take several years. Both can also rack up significant student loan debt. One way to get around this is to plan your career path accordingly.
For example, the individual could go to school and receive CNA training which can be completed in less than two months. These programs generally cost less than $500 in total. From there, the individual could begin work as a CNA while also continuing to pursue the education necessary to be a licensed practical nurse. By working, the individual can offset much of the cost of his or her education, thereby mitigating the need to take on personal loans. Although doing things this way requires an awful lot of hard work, you'll not have tens of thousands of dollars hanging over your head when you graduate.
Filing for Bankruptcy
Should you get yourself in a bad position and have to file for bankruptcy anyway, you'll most likely file a Chapter 7 liquidation or Chapter 13 reorganization. A Chapter 7 bankruptcy is the best way to go if you're looking for a clean break and you have no extremely valuable assets to protect. Under this bankruptcy you will surrender your qualifying assets to the court. The court will then turn around and sell those assets, using the proceeds to pay off your debts. Anything remaining after the sale is automatically wiped out.
If you have valuable assets you need to protect, Chapter 13 is a better way to go. This type of bankruptcy is a reorganization where you come up with a plan to pay off all your debts within 3 to 5 years. As long as you create a viable plan, and stick with it, all of your assets will remain your own. However, if you cannot come up with a workable plan the court may require you to transfer to a Chapter 7 petition. As previously stated, remember that student loans are not dischargeable. One way or the other you will have to pay them off in full.
Also keep in mind that a bankruptcy will be on your credit history for a minimum of seven years. This may hinder your ability to get a job once you graduate, because employers now routinely look at credit ratings as a measure of a potential employee’s trustworthiness. Where student loans may have created the need for bankruptcy, they may also decrease your chances of landing the job you want after graduation. So think long and hard before you declare bankruptcy because of excessive student loans.