Understanding Financial Problems

3 Ways Bankruptcy Can Help Those Struggling With Student Debt

22 September 2014 by Letitia Moreno

If you have fallen upon hard times because of student debt, and are considering filing for bankruptcy to get a fresh start, you may be worried about how it will affect you. There are many myths surrounding bankruptcy, which may prevent you from getting the financial help you need. According to United States Courts, "bankruptcy laws help people who can no longer pay their creditors get a fresh start – by liquidating assets to pay their debts or by creating a repayment plan." Here are three myths about bankruptcy:

You Will Reestablish Your Credit

Overwhelming student debt can prevent you from living your dreams. Perhaps you wanted to take out a small business loan to start a new venture, or needed a line of credit to pursue your dream of traveling around the world after graduation. With your crushing debt overshadowing your aspirations, you may feel that you'll never be extended the credit that is needed to fulfill your goals. The notion that bankruptcy prevents people from getting credit card offers couldn't be further from the truth, but there are some stipulations. While you will start to receive offers in the mail a few months after filing, they may be from lenders who charge high interest rates, or sub-prime lenders.

Getting a credit card with a low balance can help you reestablish your credit if you make your payments on time. If, however, you persistently make late payments, your credit score will not get better. Although you will receive credit card offers in the mail, it is best to talk to your bankruptcy attorney before accepting them.

You'll Lose Your Home And Car

Losing your home and car is another misconception that often prevents people from filing bankruptcy because of massive student debt. While bankruptcy laws vary between states, each state has laws that protect certain assets such as your vehicle, home, household items and retirement plans.

If you file a Chapter 13, you will probably be able to keep everything you own, and if you have a car loan or a mortgage, you can most likely keep those as well, providing you continue making the payments. There is a difference between Chapter 13 and Chapter 7 bankruptcy. The latter calls for the discharge, or liquidation, of all your debts, meaning you don't have to pay them back, but you may have to surrender certain personal belongings or your property because this type of bankruptcy does not provide for a repayment plan.

If your objective for filing bankruptcy is to avoid foreclosure due to non-payment of your mortgage, Chapter 7 is not for you. Chapter 13 will allow you to break up your late mortgage payments into manageable monthly payments so that you can catch up, avoid foreclosure and keep your home.

Chapter 7 simply erases your debts, but does not allow for a restructuring or reorganization of your debts, and while this type of bankruptcy dissolves your late mortgage payments, it won't save you from foreclosure. Most people who file for Chapter 7, no longer want to keep their homes, and are ready to give them up.

If you are a recent graduate and simply want to dissolve your debt so that you can begin new, Chapter 7 may be a viable option. Be aware, however, that your credit score may take a severe hit because of your bankruptcy status, which may negatively affect your ability to get certain jobs, especially those in the financial industry or those that require you to manage money or receive payments from customers.

Many employers require that new applicants undergo background checks, which sometimes, include credit checks. Some states do not allow credit checks, but check with your lawyer, just to be sure.

Student Debt Not Allowable

While student debt discharge is sometimes not allowed in bankruptcy, if you can prove an "undue hardship," the court may eliminate your outstanding student loans. Some lawyers do not have experience in the dissolution of student debt in bankruptcy cases, so before retaining your attorney, consider the law firm's experience level in handling student loan debt discharge options.

Student loans can incur hundreds of thousands of dollars in debt, and in some cases, people are still trying to pay down their loans even after they reach retirement age. Your bankruptcy attorney will advise you on which type of bankruptcy to consider if student loans are the only type of debt you want to include in your case.

If you have questions or concerns about whether or not bankruptcy is appropriate for your financial situation, call a bankruptcy attorney or click to read more. Most of them will offer you a free telephone consultation to review your case, without obligation to pay a fee for their initial advice.

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