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Drowning in Student Loans? Bankruptcy Can Help


Student loans

Struggling with student loans? You're not alone

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Did you rack up a five-digit student loan balance to get through college? You’re not alone. Most graduates come out of college in debt, and it’s not just because of student loans but credit card debt, too. This can be an overwhelming way to start your life after college, particularly if you struggle to find a job in your field of study. Life as a graduate comes with new expenses and no subsidies. If you’re struggling to make ends meet because of your student loans, here is how bankruptcy can help.

Should You Consider Bankruptcy For Your Debt?

If you are able to pay all your bills—including your student loans—you might want to muscle through and keep paying, even if finances are tight. Once you’ve been working for a while and get pay raises, your budget should have some breathing room. If you are head-above-water, bankruptcy is probably not for you.

But if you are living paycheck to paycheck, paying bills late, and getting behind on your student loans, you might need a debt intervention. Ask yourself, are student loans the primary problem with my budget? Most federal student loans are established on a 10-year repayment basis. That means you’re looking at a decade of debt that can be difficult to service. There are options, and bankruptcy is one of them.

How Can You Lower Student Loan Payments?

There is a federal program called Pay As You Earn (PAYE) that was expanded a few years ago to include almost all federal student loan borrowers. Under PAYE, your payments drop to 10% of your disposable income. Disposable income is your gross pay minus some deductions. There are PAYE calculators online, so you can see if these payments are lower than your standard.

However, know that PAYE payments are set for a 20-year repayment cycle. That means you’ll be paying less, but you’ll be paying longer. At the end of the 20-year repayment, any remaining balance is discharged under the PAYE program, but that amount is subject to income taxes. That means if $10k of your loan balance is written off, that tacks another $10k onto your taxable income for that year.

What About Private Student Loans?

Student loans made by private lenders can be more challenging. They are usually written at much higher interest rates than federal student loans and do not offer income-sensitive repayment options. However, one good thing about private student loans is that they do have a statute of limitations. Federal student loans do not and can follow you to the grave.

In North Carolina, private student loans are like any other unsecured debt and they become legally unenforceable after three years from the date of delinquency. This means that if you stopped paying on your private student loans in December 2013, the lender likely should not be able to sue you in court over the debt after December 2016. After seven years, the debt should fall off your credit report.

How Bankruptcy Can Help

Neither federal nor private student loans are automatically dischargeable in bankruptcy as they once were. However, if you do choose bankruptcy, you can request that your attorney file a separate lawsuit that requests the debt be discharged. A discharge is tough to get, and your odds are best if you’re permanently disabled, earn a low wage with no hope of future wage increases, are elderly, or have other extenuating circumstances.

However what bankruptcy can do is to help you deal with other debt so you can free up funds to go towards student loans. It can also put a hold on any lawsuits filed against you over student debt and give you time to get your finances sorted out.

To find out more about dealing with student loans using bankruptcy, contact the Law Offices of John T. Orcutt today. Call +1-919-646-2654 now for a free North Carolina bankruptcy consultation at one of our convenient locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.

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