Credit Report Articles

More Young Adults Turn To Bankruptcy To Discharge Student Loan Debt

As more recent graduates are finding their student loan repayment grace periods expiring and no job in sight, some are considering filing bankruptcy to discharge thousands in debt.

However, many young adults may not be fully aware of the rules governing bankruptcy, student loans and the impact to their credit score. Although bankruptcy is never a simple process, it is especially difficult to have student loans discharged by filing. A 1987 court case established a rule requiring borrowers to prove "undue hardship" in order to have their loans resolved through bankruptcy, according to the San Francisco Chronicle.

In order to determine hardship, a judge will look at three main provisions before deciding whether to include a borrower's student loans in the filing. First, a young adult must show that repaying the loans under their current income would force them below the minimal standard of living, the Chronicle reports. Second, additional circumstances must be introduced that prove the borrower's situation is unlikely to improve during their repayment period. This provision generally refers to a physical or mental condition that may preclude the borrower from gaining employment. Lastly, the young adult must show that legitimate efforts were made to meet their repayment obligations.

If the borrower finds that they are able to discharge student loan debt through bankruptcy, they should consider the effect it will have on their credit. Bankruptcies can remain on a consumer's credit report for seven to 10 years, making it very difficult for them to secure credit in the future. Although a bankruptcy may provide some form of relief to borrowers, it should be used as a last resort after all other options have been exhausted.

For example, many federal student loan programs offer flexible repayment periods that a young adult can choose from based on their current or expected income. Most standard plans set up monthly payments for a ten-year period, but consumers may opt for an extended plan that will spread the payments out over a longer period of time, allowing them to make lower payments. Borrowers who meet certain income requirements may also be eligible for an income-based repayment period, which determines the payments by looking at how much money the borrower brings in.

Regardless of what a borrower decides to do, they should keep their credit score in mind to avoid making a choice that could make it very difficult to secure credit in the future.