Newly Graduated and Facing Bankruptcy? What to Do
You went to college in order to earn a degree—one that you thought would get you started on a great career. For some graduates, that’s more or less how it works out—although for more and more people, prospects are not so rosy.
According to a study by the Institute for Financial Literacy*, the number of college graduates facing bankruptcy has risen by 20% over the past five years. If you’re in that number, here are a few things you should consider.
Know the facts about your student loans
If you’re considering bankruptcy because of your student loans, you should be aware that student loans cannot be discharged in bankruptcy proceedings. Unpaid tuition bills can, however, as long as nobody signed a promissory note with the college—if you or a family member did sign such a note, it will be considered an educational loan and treated as one in bankruptcy court proceedings.
Nobody should enter into bankruptcy proceedings lightly.
You can’t discharge your federal student loans in bankruptcy court—but you do have other options. Such as the Income-Based Repayment program, which allows low-income graduates to make reduced payments on their loans based on their debt-to-income ratio. You can find out if you’re eligible for Income-Based Repayment**. If your income falls below 150% of the US poverty level, you may not have to make any payments at all until your income rises.
There are other options as well, including student loan deferment and default—neither of which are ideal options. You may qualify for deferment due to financial hardship, although your interest will usually continue to accrue under most plans. Default occurs when you stop paying your loan bill for a period of time—often about nine months. You may already be in default now, and it’s not a good place to be—as your lender may have passed your debt on to a collections agency, and you may get sued for the balance and wind up in court even if you decide not to declare bankruptcy.
Know the types of bankruptcy
If you’re considering filing for bankruptcy, chances are you’re looking at either Chapter 7 or Chapter 13. Under a Chapter 7 bankruptcy, your debts are all eliminated—minus those student loan debts, of course—and you have to surrender some of your property in exchange. While there are some exceptions, most earnings and property you receive after filing for bankruptcy aren’t vulnerable to collection from creditors.
Under Chapter 13, you don’t lose any property—but you have to repay your debts within three to five years. When filing for this type of bankruptcy, you suggest a payment plan that must gain court approval and pass certain criteria. You can read more about both types of bankruptcy at Dummies.com: Filing for Personal Bankruptcy as Chapter 7 or Chapter 13***.
Both types of bankruptcy have their pros and cons, and you may qualify for one but not the other. Which leads us to the next step you should take:
Talk to a bankruptcy lawyer
Going into bankruptcy is a huge decision that will have a profound effect on your life and finances for years to come. You shouldn’t take this step without at least talking to a professional. It doesn’t have to cost a lot—many lawyers will give free initial consultations, so call around. Even if you have to pay a lawyer to handle your bankruptcy filing, the cost will likely be worth it.
Nobody should enter into bankruptcy proceedings lightly. Depending on the type of bankruptcy you file for, you could lose any property such as your house or car, or have your wages garnished. It’s not unheard of for employers to run credit checks on potential employees, and to change hiring decisions if they see a bankruptcy. And a bankruptcy on your record affects your ability to buy a car, rent an apartment, get a business loan, and enter into other major financial agreements that may be essential to your life and career. Before you take this step, do as much research into other options as you can—and be sure to talk to a lawyer.
*Institute for Financial Literacy
**ibrinfo.org: IBR Calculator
***Dummies.com: Filing for Personal Bankruptcy as Chapter 7 or Chapter 13
Bankruptcy Law Network: Top 15 Myths of Bankruptcy
FinAid.org: Financial Aid and Bankruptcy
Distance-Education.org: Income-Based Repayment Programs: Making Your Student Debt Load Lighter
Distance-Education.org: What to Do When Your Student Loan Goes Into Default
IRA.com: College Graduates Face Bankruptcy Woes
More About Understanding Student Loans
- Credit Repair Services You Should Never Pay For
- Questions You Should Ask Before Applying for Student Loan Forbearance
- The Bank on Students Act: What It Is, and How It Could Help Student Borrowers
- How the Death of a Co-Signer Can Affect Your Student Loan
- Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College
- If You're Unable to Work Because of a Disability: What Happens to Your Student Loan?
- New Rules for Debt Collectors: How They Could Affect Your Student Loan
- Having Trouble Repaying Loans? The Department of Education May Be in Touch