Most of us can’t imagine that students might be forced to file for bankruptcy. But in fact, the link between student loans and bankruptcy is much stronger than many have thought. It is a complex relationship in which crushing college debt leads to significant financial hardship even a decade after graduation.
Statistics show that debt accumulated to acquire a college education is a leading cause of bankruptcy, not necessarily debt accumulated in employment. Therefore, it is more important than ever to manage and repay higher education debt.
While some people are willing to accept bankruptcy as a way to finally discharge their debt, student loans are not included in a bankruptcy settlement. Therefore, even if the debt is discharged through a judgment, it is still a major factor in the poor financial situation. So what can be done?
Student Debt and Bankruptcy
What exactly is the relationship between student debt and bankruptcy? The best way to describe it is with one word: complex. For example, if a 30-year-old with $200,000 in debt, including $50,000 in college loans, files for bankruptcy, the case will only involve $150,000 in debt.
This is because lenders grant students a large number of waivers, often offering grace periods of 3 or 4 years before repayment begins. This means borrowers have had plenty of time to prepare to pay off their student debt. So why lose their money?
However, there is a possibility that the debt may be forgiven. In this case, the borrower agrees to pay 10% of their salary for 10 years, and the rest is forgiven. This means that student loans are written off for a fraction of the total debt, but often at the cost of a negative impact on your credit history. However, the impact is less than that of bankruptcy.
There are exceptions
In the vast majority of cases, student loan debt and bankruptcy are treated exclusively, but there are exceptions to the rule. The most common is the hardship exception, where borrowers must demonstrate that they are unable to repay the loan, regardless of the interest rates or terms offered.
Needless to say, applicants for such a waiver must prove their case. This means that they must prove that they are unable to support their dependents or themselves if these debts are not forgiven. This type of debt relief is only available to those most in need.
The main test for demonstrating eligibility is the Brunner test, where applicants must show that a minimum standard of living cannot be maintained, that there is an unstable financial situation during repayment, and that a reasonable attempt has already been made to repay student loans.
Get advice before making your decision
It is important to consult a good insolvency lawyer to prepare for this type of case and to find out if it is possible to obtain the hardship exemption. Remember that the relationship between student loans and bankruptcy is complex, so what seems obvious may not be true.
Applying for a discharge is a complicated matter, so consult with professionals before making a decision. Student debt forgiveness takes a load off your mind, but it is important that the application is filed in perfect order for the student loans to be counted in the bankruptcy filing.
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