Discharging student loans in a personal bankruptcy case can be difficult. The debtor must establish an “undue hardship,” which is a tough standard to meet. If you are unable to show an undue hardship, what happens to your student loans in your bankruptcy case? The answer depends on your finances, the type of bankruptcy you filed and the kind of student loans you have.
Federal Student Loans
As soon as you file your petition, all collection activity on your federal student loans must cease. In other words, you will no longer receive a monthly statement, receive collection calls, or any other notices that your payment is due. In a Chapter 7, you will receive a four to six month reprieve from making your student loan payments. In a Chapter 13, you can obtain up to five years relief from making your full payments. Additionally, in a Chapter 13 your co-debtor is protected from collection activity while your case is pending.
While bankruptcy provides you relief from being required to make your student loan payments, it is imperative to remember that interest on your federal loans will continue to accrue. Thus, if you do not make your payments while your bankruptcy is pending, the interest will accrue and leave you with a much larger amount to repay when your bankruptcy is over. Additionally, if you have been rehabilitating your defaulted federal loan, you must start over when you emerge from bankruptcy.
Private Student Loans
Private student loans are governed by the terms and conditions set forth in the promissory note you signed in favor of your lender. Many private loans have a provision that a bankruptcy filing by the borrower is considered a default on the loan. Of course, for many student loan borrowers, their loan was in default prior to seeking bankruptcy protection, so the provision doesn’t come into play. However, if your loan is not in default before you file bankruptcy and you have a co-signor, your filing being considered a default could negatively affect your co-signor.
If you have student loans and you are considering filing a Chapter 7 or Chapter 13 case, it is important to confer with a seasoned bankruptcy lawyer. To learn more about how Faro & Crowder, PA can assist you, contact us for a free consultation.