What happens to your federal student loan if you declare bankruptcy?

What happens to your federal student loan if you declare bankruptcy?

8 min read


Before filing for bankruptcy,

You may have heard about people who filed for bankruptcy then went back to school, thinking they would never need to pay off their loans, and thought that was cool. Unfortunately, going back to school after filing for bankruptcy could hurt your future. You should not file if you don’t plan on staying in school long-term. If you do, however, you’ll likely owe more money when you graduate.

After filing for bankruptcy

If you go back to school without having the finances to cover tuition or books, you might qualify for financial aid. There are two types of financial aid: scholarships and grants. Scholarships are given out based on merit. Grants are awarded based on need. Most schools that offer financial aid require that you apply first before you declare bankruptcy. In addition, some schools won’t even consider giving you financial aid until after you’ve been discharged from bankruptcy, so make sure you ask your lawyer if you want to apply for financial assistance.

How to deal with your debt after filing for bankruptcy

After you’ve filed for bankruptcy, you’ll still have to pay off any debts you incurred since the day you declared bankruptcy. This means you’ll have to repay all of your credit card balances right away and begin repaying your student loans as soon as possible. You can use your paycheck to make payments directly, or you can set up automatic payments. Your lender will supply you with instructions on how to set up automatic payments. Once you start making regular payments again, you’ll probably get a lower interest rate. You should keep making your payments until you’re completely done paying off your student loans.

What happens to your federal student loan if you declare bankruptcy?

There are two ways to file for bankruptcy in the US—either Chapter 13, where you pay off (or “reorganize”) your debts over time, or Chapter 7, where you liquidate your assets.

If you’re filing for Chapter 7, you have until April 30th to make sure you haven’t missed out on any repayment options that might help you stay current on your loans. If you’ve already missed payments, you’ll need to file for Chapter 13 instead, as that’s the only way you get to keep making payments.

That said, even though you’re not allowed to miss payment dates if you’ve filed for Chapter 7, don’t worry about missing out on repaying your loans. Because they were taken out while you were still in school, your loans aren’t dischargeable under either chapter. As long as you paid them on time, they won’t go away just because you did. But here’s how to make sure you don’t lose access to those payments now, even after filing for Chapter 7:

Filing for Chapter 13. Your first step should be to file Chapter 13 to get a fresh start. That means you’ll have to pay back all your remaining debt at once, rather than paying it off bit-by-bit. To do that, you’ll need to complete a full financial disclosure statement online, which includes information about your income, expenses, and assets. Once you submit that form, your attorney will review it and decide whether to recommend a plan to repay your creditors.

If he doesn’t, you may be able to ask the court to approve it yourself, although this isn’t always possible. You’ll also need to prove that you have enough money to pay back your debts. So you’ll need to show proof of income for each month since you graduated, including tax returns, pay stubs, bank statements, etc.

But whatever you do, don’t skip out on repaying your student loans. Even if you’re struggling financially right now, you shouldn’t put your future education at risk. As long as you make timely payments, your loans will remain in place and continue to accrue interest. Make sure you read our guide to getting rid of your student loans before you file for bankruptcy to find out more!

Wait two years. At some point, after you file for Chapter 13, you’ll want to wait at least two years before taking steps to end your payments again, unless you’re going to use the extra time to negotiate a lower rate or work out some kind of repayment agreement with your lenders. Why? Because, due to certain changes in recently passed laws, you’ll be able to apply for a deferment when you graduate.

Under these recent changes, you’ll be able to file for deferments based on your income alone, without having to declare bankruptcy beforehand. And if you qualify, you could receive a three-year extension on your monthly payments.

Unfortunately, this option is only open to people who’ve finished their degree and have been working for at least two years. However, if you’d prefer to take advantage of this opportunity right now, we’ve got a whole page dedicated to explaining how to apply for deferments, plus a list of all the different types of deferrals available.

Use private student loan counseling companies. One thing you should know is that if you’re currently enrolled in college—or are planning to return to school soon—your lender will require you to seek professional advice before agreeing to any modifications to your repayment schedule.

So if you’re dealing with private student loan counseling companies, you’ll want to try to find someone certified by the National Association of Consumer Bankruptcy Attorneys (NACBA).

Because they have licenses from the NACBA, these companies tend to offer free guidance to students, parents, and graduates with student debt concerns. These counselors often specialize in helping borrowers modify their plans, so they may be able to provide additional services beyond simply guiding you through the process of applying for deferments.

In fact, many of these companies offer free consultations to potential clients, which may give you a good starting point for choosing an expert counselor who works well with your unique situation.

Of course, if you’re already graduating and looking for a company that specializes in helping grads manage their finances, check out Gradualely. There, you’ll find several lenders that cater specifically to students and graduates.

What happens to your federal student loan if you declare bankruptcy?

Students who have been defrauded by their school’s financial aid office should know what they can do about their loans.

This video features excerpts from our PBSFrontline documentary called “Bankruptcy For Students: How Student Loans DriveStudent Homelessness.”

The film was directed by

Pete Byrne, Brian Berger, and Bill Chait

A South Carolina-based production company known for its work in the commercial sector, including many spots for Burger King and movies such as Napoleon Dynamite, Because of the controversy surrounding the issue of student loan debt and degree programs, we decided not to tell anyone what we were doing until right before we dropped off our last DVD at SRCDC. That way, students would be able to get any opinions or ideas together. Then we hand delivered them to Senator Jim Demint (R-SC) and Senator Tom Harkin (D-IA), along with letters explaining our motivations. We left feedback with the receptionist at each location. And finally, we posted updates on Facebook over the course of a few days to let people know where we were located. Overall, the response was overwhelmingly positive. People said things like, “I didn’t realize how bad it was,” and “I am sure glad I found out.” And they told us they wanted to spread the word around their networks.

We learned a lot while making this film. Here are some of the mistakes we saw companies make and recommendations for others looking to make their own college investments.

What We Were Trying to Accomplish

*Get colleges to open their books online. Many schools talk about wanting to keep their distance, yet we understand that wouldn’t leave anyone much room for error. By putting information about tuition, enrollment, and financial aid up front, someone could actually look into a school and determine if it’s worth applying to. If they aren’t getting scholarships, they could decide to apply elsewhere.

*Educate kids about choosing a major. In this day and age, a college education isn’t just a ticket to a job. It’s a gateway to personal discovery. So even though a kid might want to go to law school, he should still take business courses in high school, simply because it may help him decide what career path he wants to pursue.

*Be careful with recruitment. A lot of people fall victim to these types of scams directly after graduation. Companies convince them that if they sign up now, then they can pay back the loans later. Of course, since everyone knows going to college doesn’t always mean paying back the loans, recruiters use this against you.

Our Recommendations

What happens to your federal student loan if you declare bankruptcy?

What is Filing Bankruptcy?

Bankruptcy is the legal term for declaring personal financial insolvency. It’s a way for individuals (and businesses) who have fallen behind on their bills to restructure their finances. A bankruptcy attorney helps prepare a petition, schedule, and plan of action; then he or she represents the party before a judge. When the court approves the plan, creditors are paid off and ownership of the property changes hands.

What Happens to My Federal Loans?

If you file bankruptcy, any interest on loans, penalties, or fees will stop immediately. Your payments will still be due until the end of the repayment period, however—for some types of loans, you may not have to pay at all. If you keep making payments after filing bankruptcy, though, they go toward paying back your debt.

Will I Lose My Student Loan?

NoThe only thing you lose is the ability to make automatic monthly payments. You won’t owe anything unless you decide to start repaying. Remember that if you don’t repay a loan while you’re bankrupt, you could lose the entire amount.

How Long Does Bankruptcy Take?

It depends on how many people are involved and whether the case is filed in state or federal court. In general, it takes between two months and two years to complete, although cases involving real estate and business assets might take longer.

Is There Anything Else I Should Know?

Yes! If you have unpaid private education loans, you will probably need to talk to your lender first if you want to use bankruptcy to get out of them. Many lenders prohibit students from using Chapter 13 to discharge these types of loans.

What happens to your federal student loan if you declare bankruptcy?

There is no doubt now that the US government’s financial aid programs are broken, and it’s time to do something about it. We have heard over and over again how student loans are being used as a political weapon. Students are being saddled with mountains of debt for degrees that may not even help them find employment. If you are currently repaying federal education loans, you might want to take a look at these options before filing for bankruptcy.

You can file an application for forgiveness if you have defaulted for three consecutive years. You will need to be active in repaying your loans while having some type of income. If you are not able to get back on track after filing for bankruptcy, then you may be eligible for a discharge.

Student loan forgiveness may be available if you have a hardship or an illness that makes it difficult to repay your loans.

There are plans available for people who cannot afford to make their payments each month. These programs will allow you to set up a payment plan based upon your projected income.

There is also special legislation for military veterans and those who were injured in the service of our country.

If you are struggling to pay off your federal student loans, talk to a qualified attorney who specializes in student loan law.

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