If you are filing for Chapter 7, personal bankruptcy, that pretty much means you've done and tried it all. You've talked to a debt consolidation counselor, you've sold your assets, you've borrowed from friends and family and you've consulted a bankruptcy attorney.
There are a lot of reasons to file for Chapter 7 such as debt from credit cards, debt from your mortgage or car insurance. But what about debt accrued from financial aid? The relationship between student loan debt and bankruptcy is a tricky one.
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There are two types of debt; secured and unsecured debt. Unsecured debt is usually debt accumulated from things like credit cards. When you file for Chapter 7 bankruptcy the amount you owe is consolidated into a fraction of the original debt. With such a drastic decrease in the amount you owe for unsecured debt, you'll have more money to pay off your secured debt such as your mortgage or car payments. Thus, filing for Chapter 7 allows you to get back on your feet.
But what kind of debt is education debt? Financial aid debt is considered secured debt. Meaning if you file for bankruptcy you're still going to have to pay back your financial aid in the full amount.
But there's a catch! Any good bankruptcy lawyer would tell you to file a petition stating that your student loans are causing you "undue hardship." Proving this of course is challenging but if successful your student loans will be null and void and you won't have to repay them.
So how do you prove that student loans are causing you "undue hardship?" You need to prove three things. The first thing you need to show the court is that paying back the students loans will affect your manner of living. The second factor is that your state of debt will probably last a long time. And the third thing you need to prove for "undue hardship" is that you've made an honest effort to pay back some of the student loans.
If the majority of your debt is due to your loans then it is not recommended for you to file for this petition. But if you have an incredible amount of debt due to other things like mortgage payments and insurance payments then you can definitely try to prove how your financial loan payment is a huge financial burden on you and your family. But realize that proving "undue hardship" is extremely difficult and will involve a separate meeting with the bankruptcy judge.
If you are filing for Chapter 7 bankruptcy and feel that a student loan petition is the right move for you then contact a bankruptcy lawyer immediately to go over your current financial situation.
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