Should You Declare Bankruptcy on a Private Student Loan?

If you have fallen behind on payments, or your income has dramatically fallen, you may be looking at declaring bankruptcy to save your credit rating. Bankruptcy with private student loans is a whole area to consider, as student loans are not dischargable. A non-dischargable debt is one that cannot be totally eliminated when bankruptcy is filed, and will have to be repaid.

The only way a private student loan can be declared bankrupt is if the borrower can show complete hardship, meaning a physical inability to work along with no chance of being able to hold gainful employment.

Private Student Loans and Chapter 13

Chapter 13 is reorganization bankruptcy, and is an option for a private student loan. Under this provision, a slight reduction in debt can occur, but the borrower will still be responsible for most of the loan. This reorganization creates a payment plan under the discretion of a bankruptcy court.

Options for Repayment:

The best thing to do is to discuss some repayment alternatives with the financial institution as an alternative to bankruptcy of private student loans.

  • Work out a system with the lender for a longer period of time to repay. Many times payments can be graduated as earnings increase.
  • Consolidate all student loans into one and spread the payment over a long period of time. This may qualify for a lower interest rate
  • Discuss with the lender the potential of deferring payment until any hardships have been resolved.

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