Is Student Loan Bankruptcy Possible? What is the Effect of Bankruptcy on Student Loans?

A National Post-secondary Student Aid study revealed that college student loan debt currently stands at an average of $23,186. Clearly, this figure is a lot higher for many students. This has led a number of graduates to look into the possibility of student loan bankruptcy, debt forgiveness programs and a host of other ways of reducing the overall financial burden.

The Effect of Bankruptcy on Student Loans

The introduction of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has meant that it is no longer legally possible to write-off private or federal college student debt. However, those with an overwhelming debt burden may be able to reduce this figure through the courts. It is more likely that a court will re-schedule repayments in a chapter 13 bankruptcy debt repayment plan.

Student Loans and Bankruptcy – College Student Loan Debt can be Eliminated

The only exception to this over-riding rule is where the borrower can prove that they are unable to work indefinitely due to a permanent physical disablement. It is necessary to prove that earning potential is badly affected and that making payment will bring undue financial hardship on a family. Sadly, this will only apply to a very small number of individuals.

Avoid Paying Off Student Loans – Debt Forgiveness Programs

Those who work in certain public sector positions, such as teaching, nursing and the armed forces may be able to benefit from a debt forgiveness program. These will eliminate a set percentage of federal student loan debt in return for each year of public service. It is important to note that many programs have experienced cutbacks since the economic downturn. They are not applicable to private bank loans.

Paying Off Student Loans Later – Student Loan Deferment

Provided that a college student loan hasn’t been defaulted on, the borrower could defer student loan payments. The maximum period of deferment for unemployment or financial hardship is currently capped at three years. However, deferring student loan payments won’t prevent the accrual of interest. The exception to this rule are Perkins loans and the means tested Stafford loan.

Student loan bankruptcy will only write-off college student debt for a small number of individuals. It will be necessary to demonstrate that a disability will affect that person’s long-term earning potential and create serious financial hardship. The effect of bankruptcy on student loans can still be a positive one as it is possible to affordably restructure debt repayments. There are also a number of ways to help pay off student loans which are well worth considering.

Debt Consolidation Loan or Debt Settlement Plan? Is it Better to Consolidate Debt or Seek a Debt Solution?

Debt consolidation loans have grown in popularity as consumers have too many active credit agreements to be able to manage their finances satisfactorily. According to APACS, there are now more credit cards than people in the UK. Whilst the UK has a population of 60 million, there were 71.3 million active cards at the end of 2016. Whilst many consumers consolidate debt and make a single monthly repayment others prefer a debt solution, such as a debt settlement plan or Debt Management Plan.

How a Debt Consolidation Loan Helps

Individuals with multiple credit agreements, such as credit card debt, small loans, hire purchase or overdrafts, often find that personal finances are unduly complicated. Making monthly repayments to lots of different lenders not only increases the chance of a missed or late payment, it is normally more expensive. Consolidating debt with a loan is a way of combining all debts and making a single, affordable monthly repayment.

The Pitfalls of Debt Consolidation Loans

  • Most loans are secured on the family home. Should a borrower default on the agreement, it can lead to home repossession. Try to consolidate debt with an unsecured loan. If this isn’t possible, consider a debt solution, such as a debt settlement plan.
  • Increasing the term of a loan may reduce monthly repayments, but it also increase the cumulative amount of interest paid over the loans duration.
  • Consumers who choose to consolidate debt often make the mistake of borrowing more money than it needed. Taking a holiday or making an impulse purchase will increase debt.
  • Using equity in the family home means that it may become more difficult to move or refinance in the future.

The Objective of Debt Settlement Plans

Whilst a debt consolidation loan is aimed at reducing monthly repayments, a debt solution is concerned with managing or clearing debt. A debt settlement plan is a means of writing-off up to 50% of unsecured personal debt, most commonly credit card debt, in return for a monthly repayment for a period of 3 to 5 years. Provided creditors agree, any outstanding debt is completely written-off.

The Downside of Debt Settlement Plans

A debt settlement plan can clear financial difficulties more quickly than a debt consolidation loan. However, there are a number of pitfalls associated with this debt solution.

  • Few creditors will agree to a debt settlement plan unless several monthly repayments have been missed. This means that a debtor will have bad credit as missed and late payments will be reported to all major credit reference agencies.
  • Debt settlement plans are front-loaded. This means that debt settlement companies will add their fees to any existing credit card debt. This will initially increase the amount owed meaning that it will take 4-5 months to clear the fees.
  • The delay in receiving payment is likely to result in collection agencies continuing to make contact. This can be very unsettling for a debtor who believes that a debt solution has resolved all of their financial worries.

How Debt Settlement Plans Help

Consumers who have already missed or made late payments on credit card debt will find that a debt settlement plan is a better option than a debt consolidation loan. This is because a bad credit rating makes a loan more expensive due to the risk now posed to lenders. It is also sensible not to turn unsecured into secured debt as it provides creditors with collateral in the event of loan default. A debt settlement plan negates the need for further borrowing.

A debt consolidation loan is usually the right option when a consumer has a good credit rating and is in a relatively safe job. Should a consumer have missed or made late payments on credit agreements, a debt solution, such as a debt settlement plan, could prove to be more viable.