If you attended an expensive four-year college, chances are good that you graduated with a heavy burden of student loan debt. In a tight economy, millions of American graduates who can't find steady employment are struggling to repay their education loans. While these credit facilities typically carry lower interest rates than riskier credit cards and personal lines of credit, their sheer size can create an overwhelming burden. Every year, thousands of Americans who can no longer keep up with their ballooning student loan balances are forced to declare bankruptcy.
When you file for bankruptcy, you'll be able to use a process known as "debt discharge" to escape liability for many of your unsecured debts. These typically include outstanding credit card bills, personal loans, business loans, unsecured lines of credit, medical bills and court judgments. You won't be able to escape liability for secured debts tied to specific assets. Mortgages, vehicle loans, and rent-to-own purchases are the most common types of secured debts. During the bankruptcy process, you stand to lose all of the assets that you obtained using secured loans.
Although student loans aren't tied to physical assets, they can't be discharged during bankruptcy. In most cases, your bankruptcy filing will have no bearing on your outstanding student loans: You must continue to pay them down in a timely fashion or face the threat of legal action from your student lender. In some cases, you may be able to negotiate a longer-term repayment plan that lessens the severity of your immediate debt crunch.
Your post-bankruptcy relationship with your student lender may depend upon the type of bankruptcy that you file. If you file a Chapter 7 bankruptcy, it's possible that your student lenders will seize some of the assets left over after your secured creditors have been satisfied. They may also place a lien on your savings. If you've been delinquent on your student loans for some time before making your Chapter 7 bankruptcy filing official, your lender may obtain clearance to garnish your wages. You could lose up to 25 percent of your take-home pay to this action.
If you file a Chapter 13 bankruptcy, it's more likely that your student loan debt will be restructured. In rare circumstances, you may be able to petition your presiding judge for an "undue hardship" designation. You'll need to prove that a physical disability or other impairment consigns you to permanent underemployment.