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Bankruptcy and Student Loans Available Options

Available options to handle your student loan debt

Bankruptcy is a serious step that many people contemplate after their financial obligations become overwhelming. They hope that they can get a fresh start and be rid of the hefty student loans that they have accumulated or that they took out for their children’s educations. However, school loans are not typically discharged by bankruptcy. There are a few exceptions and alternatives to help you deal with your obligations in a wise and responsible manner. Bankruptcy and student loans are ineligible for discharge.

If you become bankrupt, you can have your loans discharged if you can prove that paying the debt obligation will be an undue hardship on you. Typically you must prove that you are permanently and totally disabled. A physician must sign a form that states that your disability will likely cause death, has been ongoing for at least 60 months or will lead to a disability that lasts for at least 60 months. Loans that qualify for discharge under these guidelines include FFEL, Perkins Loans, Direct Loans or TEACH grants. Veterans can also use this type of discharge, but they complete a different set of paperwork and follow different guidelines. If approved for discharge, you will then undergo a three-year monitoring period. During this period, you may not annual income that is above the poverty guidelines for a two-person family as determined for the state where you reside and you may not receive new loans.

Other options are available to handle your student loan debt. You may be able to use a different repayment plan that is more manageable for your budget. You may be able to defer payments or forbear them for a specific period of time. You may also be able to pay reduced payments over an extended period of time. Some loans allow you to make interest-only payments that are based on your income. You may also be able to alter your payment amount in accord with your income and the size of your family.

You may be able to claim that your education loans are an undue hardship during a bankruptcy proceeding. You will have to explain in front of a judge how the loans are an undue hardship. You must prove how your financial situation is not likely to improve in the future, that you tried your hardest to pay down the loans and that you will not be able to afford life’s basic necessities if you must repay the loans that you accumulated. Even if you can prove all of these elements, a judge is likely to deny your request if you are not a disabled individual. If you have disposable income and a steady stream of income, you may be able to file under Chapter 13. Chapter 13 does not discharge your debt, but it may provide you with an opportunity to lower your payments that you make for your loans each month.

A final option is to place your loans on an unsecured credit card with a low balance. This will allow you to pay down your loans at a slower rate to ease the financial pressure.

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