Bankruptcy. Most would consider this a negative word. It is associated with having no money, which is not a financial state most people would want to be in. However, in some circumstances, it might be beneficial for people with outstanding debts to file for bankruptcy. In this article, we’ll go over what bankruptcy means legally, and how it can be a positive step for some people depending on their circumstances. Specifically, we’ll look at how students can benefit from bankruptcy in certain scenarios.

What Does It Mean to File for Bankruptcy?

Bankruptcy is the legal process that those who have many financial debts can apply for, so their debt is relieved. This process may be beneficial for some people depending on their unique circumstances. To begin the process, you must petition bankruptcy through the bankruptcy court system. There are different types of bankruptcy to file for, each named for their respective bankruptcy codes.

Some common assets that may be affected by bankruptcy are if you are paying for a house, car, or other property. These mortgage and car payments will allow the creditors to seize the items, unless you file for bankruptcy. If you file under Chapter 7 or Chapter 13, these types issue an automatic pause on any attempts at collection efforts. This means that you could keep your property or car while you handle your debt.

How Can Bankruptcy Affect You?

Bankruptcy can be both helpful and harmful to you, depending on your circumstances. So let’s review the consequences, both good and bad.

A positive aspect of bankruptcy is that when you file, creditors can no longer pursue payment of your debt, pending the completion of the bankruptcy proceedings. This means that creditors must stop bombarding you with payment requests. In addition, you can have legal representation to assist you in the court process, and legal actions regarding your debts will be paused throughout the proceedings. Upon completion of the proceedings, your qualified debts may be either erased or significantly reduced.

But bankruptcy doesn’t always guarantee all of these positive outcomes. You also have to consider other people if you cosigned for a debt because your partner still holds responsibility for the debt. If you file for bankruptcy, they may still be pursued by creditors so you’ll want to discuss this big decision with them.

In addition, your future credit and applications for certain purchases might also be affected. When you first file, your credit score will likely take a hit. Places like banks, credit card companies, and even certain jobs may view a bankruptcy on your credit record – which lasts for 10 years – as a negative. You need to remember that this isn’t going to last forever, and your score may even bounce higher than you ever anticipated.

With no debt or a reduced amount of it, you have new flexibility to buy things you might’ve been denied before due to your past debt load. In addition, once your bankruptcy proceedings are complete and you are able to make timely payments on any still-existing debts, your score will likely rise quickly.

How Does This Apply to Student Loan Forgiveness?

If you took out loans as a student to pay for your education, this is where it gets tricky regarding bankruptcy. According to Forbes, over 50% of students attending either a private or public four-year university end up taking out loans to afford college. And 92% of these loans are federal loans. So you aren’t alone if you’ve had to take out a loan. As college costs have increased, it’s not unexpected to need to take out loans, but it’s worrisome to think about paying them off later.

Previous to the Fresh Start Initiative, the precedent for student debt and bankruptcy was virtually nonexistent. Essentially all student debt was exempted from bankruptcy. This means that even if you filed, these debts would not be waived so you would still be left to pay off these loans. Students can try to file and prove undue hardship, which is the idea that by being left with these loans, the person is prevented from having an adequate standard of living. But this is difficult to prove, so the vast majority could not get their loans waived. Less than 1% of student loans filed in bankruptcy were discharged. Clearly, prior to the initiative, there were very few options aside from paying off the loans, which can take a toll both mentally and physically since it might be 30+ years before they’re paid off, due to mounting interest.

How Can I Use the Fresh Start Initiative?

The Fresh Start Through Bankruptcy Act of 2021 (otherwise known as the Fresh Start Initiative) was passed to give students an option when handling an excessive amount of debt, with seemingly no way out. This act allows federal loans to be waived if a student has been paying for 10+ years and filed for bankruptcy. Those who have private loans and/or have not been paying for 10+ years may demonstrate that they have undue hardship to have their debts waived. This means that you have to demonstrate that paying back the loan would create an unnecessary difficulty or challenge. Nevertheless, both options give students a chance to be relieved of their debt, an option that did not exist before. Filing bankruptcy is a serious decision but sometimes it’s the best option for students with overwhelming amounts of student debt.

Additionally, there is increased accountability involved with the initiative as well. It requires colleges that have one third of their students taking out federal student loans to provide a partial refund to students’ who file for bankruptcy. This requirement would be enforced if the school has a history of having high student loans with low repayment rates, which would hopefully improve those schools’ financial aid provisions as a result.

Where Does This Leave Me with My Student Loan Debts?

While filing for bankruptcy can be beneficial to some, it can be harmful to others. Bankruptcy can affect your future, both positively and negatively. And student loans specifically add another complication since it is a separate debt from most normal debts.

This is a confusing process that involves considering your options carefully. An expert attorney who can draw on their extensive knowledge will help pick the best option for your unique circumstance. Rosenblum Law attorneys will review your individual case and financial situation, and advise you on the best path forward. Call us today at 888-815-3649 for a free consultation.