For many years, most individuals have struggled with the misconception that one cannot file for student loan bankruptcy. The truth is, discharging federal student loans is practicable. However, it is the most challenging among other types of debts. One must assess the available options before making the final move. Read through to understand your options to pay off student loan debt and when it makes sense to file bankruptcy on student loans.
Your Options For When You Can’t Pay Back Loans
As your financial situation changes, you may want to look at all of your options to pay off student loan debt. Suppose your income changes, your family grows, or an unexpected life event occurs. In these cases, you should be more proactive about paying back debt to find a strategy that works for your current and future financial situation. Here are your options if you can’t pay back your student loans.
Option 1: Get Serious About Saving
Consider creating a budget to help you save more money. There are many ways to save money. Cut your living expenses, reduce your grocery budget, cut subscription services that are underutilized.
Option 2: Find Ways to Make More Money
Consider getting a second job or finding a way to make passive income. There are many ways of creating passive income to generate more income and meet your student loan payments. Adding passive income to your day job can help you get out of debt quicker.
Option 3: Adjust or Switch Repayment Plans
A repayment plan determines the monthly amount, length of time, and interest you pay over your loan duration. You can ask your servicer to switch from student loan repayment plans at any time. There are other ways to pay your loans off faster besides changing your student loan repayment plan. However, it’s essential to keep in mind that the longer it takes to pay back a full loan, the more interest will accrue over time.
Student Loan Repayment Plans
Consider choosing a different repayment plan that better fits your current (and future) financial situation:
Standard Repayment Plan - fixed monthly payments that you pay for ten years.
Graduated Repayment Plan - lowers monthly payments at the beginning of the loan and then increases the amount paid every two years.
Extended Repayment Plan - allows you to repay your loans over an extended period (up to 25 years).
Pay As You Earn Repayment Plan (PAYE) - Generally 10% of your discretionary income, but never more than the 10-year Standard Repayment Plan amount.
Revised Pay As You Earn Repayment Plan (REPAYE) - Generally 10% of your discretionary income.
Income-Based Repayment Plan (IBR) - For new borrowers, this plan is generally 10% of your discretionary income - otherwise, it’s 15% of your discretionary income if you're not a new borrower. It’s never more than the 10-year Standard Repayment Plan amount.
Income-Sensitive Repayment Plan - This plan is available to low-income borrowers with Federal Family Education Loan (FFEL) Program loans.
Income-Contingent Repayment Plan (ICR) - The lesser of the following: (1) 20% of your discretionary income or (2) what you would pay on a student loan repayment plan with a fixed payment for 12 years, adjusted according to your income.
Option 4: Consider Loan Consolidation and Refinancing
For those with private student loans, refinancing is an option to help you pay your student loans. By refinancing, you can lower student loan payments by either reducing your interest rate, extending your repayment period, or some combination of both.
Option 5: File for Bankruptcy
Generally speaking, filing bankruptcy on student loans won’t automatically discharge your debt; however, every case is different. A discharge from student loan debt is not easy, but with an experienced lawyer, it’s not impossible.
How to File for Bankruptcy on Student Loans
Pursuing bankruptcy features several stages, where discharging the loan comes last. Consider the following preliminary moves to file bankruptcy on student loans.
Reach a Bankruptcy Lawyer
Even though it may seem unnecessary, finding a bankruptcy attorney experienced in student loans has significant advantages. They handle intricate issues so you can go through the process smoothly. However, understand that hiring an attorney comes at a cost, which means that you may not be eligible for student loan bankruptcy discharge since you have proven to have money.
Some attorneys offer free counsel for you to understand how to file bankruptcy on student loans and if you have any chances to achieve your objective. That way, you decide whether to go one with the plan or to find other options.
Proving Unjustified Financial Strains for Student Loans
One requirement to clear student loans through bankruptcy is to prove the financial strains that they exert. Courts in the US employ varying interpretations to understand how to declare bankruptcy for student loans. The Brunner test is usual among several courts when making their judgment concerning hardships.
While filing bankruptcy on student loans is never the best approach, there comes a situation where it is the only way out. Such circumstances emerge when aspects like medical debts and credit card bills apply.
Understanding Undue Hardship
Each individual may have unique undue hardships when it comes to student loans. It is where one is unable to service their loan attributed to financial challenges. For example, if one struggles to pay rent, or meet their essential needs, compelling them to settle a student’s loan is equivalent to torture. If you get into an accident that incapacitates you while having a significant student loan, you may qualify for a discharge. There are several undue hardships situations that your attorney can assess and advise on the way forward.
However, a successful process in filing for student loan bankruptcy has several limitations. Among them, you lack the freedom to pursue career goals such as employment or further studies. Similarly, most courts dictate that you show efforts to pay the debt in the future before proceeding.
What are the Possibilities when Filling for a Student’s Loan Discharge?
There are three probabilities when you have filed for a loan bankruptcy.
The court may do away with all your students’ loans, leaving you free of any conviction.
You may be eligible to pay the loan under friendlier terms such as extended duration or reduced interest and installments.
The judge may fail to discharge your loans based on various legal assessments.
Our Attorneys Are Here to Help
While filing bankruptcy on student loans may seem intricate, you have better chances with the right attitude and well-defined facts about undue hardships. The Michigan bankruptcy attorneys at Moran Law can assess your financial situation to build a viable case.
