Can I Get a Student Loan While in Chapter 13 Bankruptcy?
People tend to use the time while working through bankruptcy to set new goals for themselves. One way that some people plan to better themselves and build a more stable financial future is through earning a degree. But how can you afford college tuition when you’re sticking to a bankruptcy repayment plan? Can you take out a student loan to make this possible?
Your goals for a brighter financial future are important. Bankruptcy judges and trustees don’t want to make your path towards improvement more difficult. Yet, getting loans while working through bankruptcy isn’t a clear-cut process. Learn more about the possibility of student loans during bankruptcy, if filing for Chapter 13 will make it harder to borrow money in the future, and how student debt can be discharged through bankruptcy.
How to Get a Student Loan While Bankrupt
First, you should discuss your plans with your bankruptcy attorney. Together, you can decide the best way to approach the bankruptcy trustee. While under Chapter 13, new debt must be approved by the trustee overseeing your case.
Then, you may be required to present a strong plan to both lenders and the trustee. The bankruptcy trustee will be looking to understand:
- If pursuing a university degree could endanger your ‘best effort’ at repaying debt in Chapter 13.
- If Chapter 13 repayment and student loan repayment will coincide.
- If earning this particular college degree will increase your employment possibilities.
- And, if the new job will ensure your ability to repay the new student loans.
Federal Student Loans
You may be wondering, ‘Can I get federal student loans after filing for Chapter 13?’ Well, the answer is complex.
According to Federal Bankruptcy Law, a government agency cannot turn down a student loan applicant simply because that person has filed for bankruptcy. At the same time, agencies cannot give out new federal loans to someone who is behind on payments for another federal loan. The loan application could also be denied for other reasons. This means, however, that it is possible for someone going through the Chapter 13 process to successfully get a federal student loan.
Private Student Loans
Unfortunately, there is a slim chance of getting approved for a private student loan while going through bankruptcy. This would be difficult because there is no law barring private loan agencies from automatically disqualifying bankrupt borrowers. In general, the loan process is built on trust. Declaring bankruptcy affects your credit report and it breaks this trust. A past history of payment problems warns lenders that you may struggle with repayment of a student loan in the future. Luckily, you can work to improve your credit and regain trust for private lenders down the road.
How Bankruptcy Impacts Your Ability to Get a Student Loan in the Future
‘What if I wait until after the Chapter 13 process is complete to apply for a student loan?’ The same general rules from above apply here. Federal student loans cannot be denied just because of your bankruptcy history. As long as there is no history of default or delinquency with previous or current federal loans, you are still eligible for new federal student aid. If you’re struggling with repayment, it’s important to set up a plan with your lender to get current before trying to take out more loans.
Private financial aid lenders, on the other hand, will likely consider bankruptcy history as evidence of unreliability for repaying borrowed money in the future.
How Bankruptcy Impacts Your Ability to Get Loans to Pay for a Child’s Education
‘I need to take out loans to cover my child’s college tuition; can I borrow money after bankruptcy?’ To tell you the truth, it will be difficult to get approved for a loan. Parents requesting PLUS loans may not be eligible because of poor credit history.
There is some good news. If you had a loan discharged by bankruptcy in the past 5 years, a PLUS loan may be attainable if someone with good credit also signs off on it. Also, if a parent is turned down by lenders, their child may be able to secure more borrowed money through Stafford loans.
How Current Student Debt is Handled in Chapter 13 Bankruptcy
‘Will declaring bankruptcy cancel out my accumulated student debt?’ Most current student loans are not dischargeable in the Chapter 13 bankruptcy process. If you qualify for Chapter 13, an automatic stay is put in place to protect you from credit collectors. Then, debt is bundled together and a repayment plan is set up to help you successfully work towards completion. When the repayment plan is complete (up to 5 years), most nonpriority unsecured debt is discharged.
Though both federal and private student loans are considered nonpriority student debt, they are not automatically discharged through bankruptcy. The only way these loans can be discharged is by proving to the bankruptcy court that repayment would cause you ‘undue hardship.’ This term describes a situation in which the debtor:
- Has already made a strong effort to pay back the student loan before filing for bankruptcy.
- If forced to repay the debt, could not sustain a minimal standard of living.
- Would struggle financially for an extended amount of time during the repayment period.
Proving undue hardship is extremely difficult and bankruptcy judges rarely grant this type of relief. That’s why, for most cases, student loans are considered non-dischargeable.
How Bankruptcy Helps You Manage Student Debt
Federal and private student loans are usually not discharged in the bankruptcy process. Although filing for Chapter 13 can help you manage repayment in the following ways:
- The automatic stay will give you time to catch up on payments. During the automatic stay, creditors cannot harass you.
- Through bankruptcy, an affordable payment plan is set up to reorganize and address all of the debt owed. In this way, filing for Chapter 13 can decrease or delay the regular payments required for student loans.
Plan a Brighter Financial Future
Amourgis & Associates are experienced bankruptcy attorneys with multiple locations in Ohio. Schedule a consultation to discuss your financial situation and goals for the future. We can help you develop a strong strategy for getting back to high ground and assist you through every step of the process. For professional legal advice regarding bankruptcy, contact Amourgis & Associates at 800-444-1967.