Student Loans Cannot Be Discharged in Bankruptcy…Or Can They?

July 14, 2010
By

Student loans cannot be discharged in bankruptcy – you could claim bankruptcy 100 times and your student loans will still exist.  Some lawmakers, however, are trying to change that!  Debt from credit cards, auto loans and mortgages will be discharged (completely erased!) upon claiming bankruptcy.  Now this may sound good, but your credit score will drop several hundred points following a bankruptcy and your score will remain that low for 7-10 years, making it nearly impossible to receive any type of loan.

Lawmakers are trying to add student loans to the list of debts that can be easily discharged in bankruptcy.  Again, while bankruptcy is not an attractive fix to anyone’s debt problems, it can be a last resort option when your debt seems so insurmountable and impossible to pay off.

If such a plan passes the House and Senate, it would only apply to private student loans (loans from lenders such as Citibank, Wells Fargo, Bank of America).  Federal loans (Stafford loans) are not included in this plan.

Some students borrow hundreds of thousands of dollars to finance their education – this debt then accumulates with interest and later on in life, those straddled with such debt are forced to make a very scary decision:  Should I pay my mortgage or my student loan debt?  Should I pay my utility bill or my student loan debt?  In cases as severe as this one, claiming bankruptcy on student loan debt would be a huge help, an option that is currently unavailable thanks to a change in the bankruptcy law in 2005 that prevents student loans from being discharged in bankruptcy.

Would bankruptcies increase?

Having all of your student loan debt disappear is certainly a benefit.  But is it worth ruining your credit?  There are ways to fix your credit after something as financially damaging as a bankruptcy or a foreclosure, but the entire bankruptcy process can be long and overwhelming.  While we can’t say for sure how this plan will affect the number of bankruptcies until after it passes, we can draw conclusions and say that mostly those with dire situations will resort to claiming bankruptcy on their student loans.

What are your thoughts on this new student loan legislation?  Post your comments below:

Tags: auto loans, bank of america, bankruptcies, bankruptcy law, bankruptcy process, citibank, claiming bankruptcy, college costs, credit score, Debt, debt problems, federal loans, private student loans, stafford loans, student loan debt, studentl loan reform, ways to fix your credit, wells fargo, wells fargo bank

This entry was posted on July 14, 2010 at 4:06 pm and is filed under College and Money, Debt. You can follow any responses to this entry through the RSS 2.0 feed.

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  • txguy

    With the cost of education these days, it seems likely that funding an education through private loans then looking to bankruptcy my unfortunately become a “plan” for some younger people. In my scenario, my parents funded our undergrad, but any continuing eduction we were on our own. I know that my sister had over 100k in loans from med school (yeah I know that was cheap).

    What’s to say a 23 year old with 120k in loans doesnt look to file for bankruptcy, and rebuild their credit, and basically be in the clear by age 30? Seems better than paying on $800 a month in loan payments during that time. I guess filing for bankruptcy isn’t an easy process, but paying off $120k in debt while just getting started isn’t either. Then who’s left with the bill?

    Thoughts???

  • txguy

    With the cost of education these days, it seems likely that funding an education through private loans then looking to bankruptcy my unfortunately become a “plan” for some younger people. In my scenario, my parents funded our undergrad, but any continuing eduction we were on our own. I know that my sister had over 100k in loans from med school (yeah I know that was cheap).

    What’s to say a 23 year old with 120k in loans doesnt look to file for bankruptcy, and rebuild their credit, and basically be in the clear by age 30? Seems better than paying on $800 a month in loan payments during that time. I guess filing for bankruptcy isn’t an easy process, but paying off $120k in debt while just getting started isn’t either. Then who’s left with the bill?

    Thoughts???

  • txguy

    With the cost of education these days, it seems likely that funding an education through private loans then looking to bankruptcy my unfortunately become a “plan” for some younger people. In my scenario, my parents funded our undergrad, but any continuing eduction we were on our own. I know that my sister had over 100k in loans from med school (yeah I know that was cheap).

    What’s to say a 23 year old with 120k in loans doesnt look to file for bankruptcy, and rebuild their credit, and basically be in the clear by age 30? Seems better than paying on $800 a month in loan payments during that time. I guess filing for bankruptcy isn’t an easy process, but paying off $120k in debt while just getting started isn’t either. Then who’s left with the bill?

    Thoughts???

  • txguy

    With the cost of education these days, it seems likely that funding an education through private loans then looking to bankruptcy my unfortunately become a “plan” for some younger people. In my scenario, my parents funded our undergrad, but any continuing eduction we were on our own. I know that my sister had over 100k in loans from med school (yeah I know that was cheap).

    What’s to say a 23 year old with 120k in loans doesnt look to file for bankruptcy, and rebuild their credit, and basically be in the clear by age 30? Seems better than paying on $800 a month in loan payments during that time. I guess filing for bankruptcy isn’t an easy process, but paying off $120k in debt while just getting started isn’t either. Then who’s left with the bill?

    Thoughts???

  • Themorrisfamily6

    I am going through a crazy situation right now and I think that in this type of situation bankruptcy should be allowed. My husband was injured 5 years ago leaving him on diablilty, we had always planned on me being stay home mom and so when he was hurt, I knew I had to get back to school..I was going for a 4 year degree for with 5 kids I needed a job to help us survive. This past September I was diagnosed with cancer.After a horrible surgery and a not so good recovery, I am still awaiting radiation and much more problems and care to ultimately hope for survival. Now my private student loans are coming due which with interest over the past 5 years are totally 100K and over $600 a month. I can’t pay them.
    I can barely feed my kids or keep a house over their head right now for the only income we have is social security for my husband as I await my own…Does anyone know how I can get help here? My federal loans may be discharged by my disability but I don’t know if that works for private loans or not. Also Bankruptcy says if it is a certain undue hardship? How do you qualify for this?
    Thanks for listening, any help my email is themorrisfamily6@yahoo.com