Why Student Loan Borrowers Are Being Treated Like Criminals

If it sometimes feels like student loan borrowers are treated like criminals, that's because the law actually does.

Student loans are different from almost any other form of borrowing. Unlike credit cards or other unsecured debts, they can rarely be discharged in bankruptcy. (You can learn more about the implications of bankruptcy here.) Legally, it’s better to think of college and grad school debt as akin to a child support payment.

The $1.3 trillion student loan crisis has many causes, but the slow erosion of consumer rights to gain student debt relief ranks right near the top. That $1.3 trillion debt is truly an anchor for life to the 44 million Americans who owe it. (And not paying those loans can have pretty severe consequences, including serious credit damage. You can see how your student loans affect your credit by a free snapshot of your credit report every 14 days on Credit.com.)

How It All Started 

The trouble began in the mid 1970s, as student loans became common and urban legends around “deadbeat” former students started to spread. In 1976, Congress considered a dramatic change to the nature of student loans — taking them out of the bucket that makes them similar to credit cards or personal loans, and moving them into the bucket that governs criminals like tax scofflaws. Back then, Congress was wise enough to commission a Government Accounting Office study, making such a step permanent.

The study came back showing that fewer than 1% of student loan borrowers had declared bankruptcy. That led Rep James O’Hara (D-Mich.) to say it would be grossly unfair to lump them in with the deadbeats. Soon after, the U.S. Senate voted to strip the provision from a proposed bankruptcy reform bill that made college debt non-dischargeable. But for reasons unknown, a group of Congressmen in the House, led by Rep. Allen E. Ertel (D-Pa.), held firm to their conviction that student loans were creating a moral hazard. They won the day, and non-dischargability of student loans was included in the Bankruptcy Reform Act of 1978.

The 1978 limitation meant students had to try to pay their loans back for at least five years before they could seek relief in bankruptcy court. Even today, critics of the way bankruptcy laws work don’t find fault in that notion — to prevent someone from leaving school and immediately erasing their debt before making an honest effort to earn an income.

However, the 1978 law opened the door for further tightening of the debt noose on borrowers, which happened methodically over the next decades. In 1990, the repayment period before a discharge was extended to seven years. The Debt Collection Improvement Act of 1996 allowed Uncle Sam to garnish Social Security checks. Then, in 1998, the seven-year ban became infinite. Loans made or guaranteed by Uncle Sam to students could never be discharged, with very few exceptions.

Worse still, in 2005, the permanent ban on bankruptcy for student borrowers was extended to private student loans — those that have nothing to do with Uncle Sam. Private banks lending teenagers money for college now hold a “till death do us part” contract.

Times Have Changed

Steven M. Palmer, a Seattle-based bankruptcy attorney who has written about the history of student loans, said it’s important to keep some perspective about what Congress might have been thinking back in the 1970s.

In 1976, tuition, room and board cost an average of $2,275, according to the Department of Education (in current dollars). By 2015, it was $25,810.

“Back then, the cost of education was so much less,” Palmer said. “The total amount of debt was a tiny fraction of what it is today … The system has led us to where we are now, where everyone has to take out student loans. And then they are getting out of school and not able to find jobs.”

For the desperate student borrower, there is an exception to the bankruptcy code, known as “undue hardship.” But practically speaking, that’s legalese for “nearly impossible.” (Disabled borrowers may also qualify for a total disability discharge of their education debt.)

An attempt to discharge a student loan requires a separate legal process from a traditional bankruptcy, called a Complaint to Determine Dischargeability. It’s an adversarial process that can require discovery, depositions and even arguments in court against Department of Education lawyers.

This can cost the debtor 10 times the price of a standard bankruptcy, Palmer said. And an attempt to get free from student loans can easily cost $20,000 to $30,000 in fees — which still may not work. Also, said Palmer, it’s critical to remember that declaring bankruptcy is hardly easy, nor does it erase all a family’s problems.

“Many of my clients have so much they still need to end up paying after bankruptcy, my counseling is often to ask, ‘How will you be better off?’ In some cases, they are really in a terrible spot … really still pretty well screwed after the bankruptcy.”

More Calls for Reform

In 2007, Michigan Professor John A. E. Pottow wrote the definitive history of the issue in an academic paper, “The Nondischargeability of Student Loans in Personal Bankruptcy Proceedings: The Search for a Theory.”

“This is harsh and dramatic treatment, and it is worthy of scholarly attention,” he wrote.

Pottow dispensed with most operating theories using data – that bankruptcy encourages students to commit fraud, or that Uncle Sam is merely protecting taxpayers, for example. He ultimately suggested some kind of income-contingent test, which ties bankruptcy eligibility to a calculation that takes into account school costs and potential post-school income.

“In addition to being attractive theoretically, income contingency could also help a troubling trend,” he wrote. Apparently certain “sub-prime” schools target a financially vulnerable client base by upselling classes and educational programs of dubious worth, confident that they will have repayment leverage through non-dischargeability in bankruptcy. An income-contingent approach might dry up this unwelcome market.”

More recently, in a 2012 report, the Consumer Financial Protection Bureau called on Congress to make bankruptcy available to some student debt holders.

“(It would be) prudent to consider modifying the code in light of the impact on young borrowers in challenging labor market conditions,” CFPB director Richard Cordray said.

Palmer, the bankruptcy lawyer, noted giving such debtors a fresh start wouldn’t only help former students. College debt has been tied to delayed household formation, which can have a domino effect: Young graduates may get married later, start families later, buy homes later, and so on. (If this sounds like you, here’s how to tell if you’re ready to shop for a home.)

Other critics have gone even farther.

David Graeber, author of the book, “Debt: The First 5000 Years,” says the punishing student loan situation is wrecking a generation, and by extension, its future.

“If there’s a way of a society committing mass suicide, what better way than to take all the youngest, most energetic, creative, joyous people in your society and saddle them with, like $50,000 of debt so they have to be slaves?” he said at a talk in 2013. “There goes your music. There goes your culture.”

Image: Jacob Ammentorp Lund

The post Why Student Loan Borrowers Are Being Treated Like Criminals appeared first on Credit.com.

32 Ways to Leave Your High-Interest Credit Card

credit card with high apr

Sure, there were the good times — back when you and your credit card first got together. Maybe your card was giving you a 0% introductory APR. Maybe you went everywhere together, bought everything together … but things changed. Today you feel like you’re giving a lot more than you’re getting, and now you’re wondering how you can leave your high-interest credit card behind.

While there aren’t as many options for leaving your credit card as there are ways to leave your lover (Paul Simon famously notes there must be 50 of those), it doesn’t mean you’re stuck. No, you’re probably not going to be able to slip out the back, Jack (that debt’s not going away even if you run!), but you most definitely can make a new plan, Stan. So don’t be coy, Roy, just listen to me …

1. Negotiate a Lower Rate

Most people don’t bother to ask their credit card issuer for a lower rate, but sometimes lowering your current APR can be as simple as that, so …

2. Don’t Be Afraid to Ask

Before you storm out on your credit card, try communicating. It could be worth your time to see if your card issuer will lower your interest rate, especially if your relationship is a long one. Keep in mind, they might pull your credit to see if you’re deserving of a lower APR. That’s why you’ll want to …

3. Check Your Credit Score …

You’ll want to get an idea of whether you’re likely to qualify for a lower APR, lest you incur a hard inquiry on your credit report only to get rejected. (You can view two of your free credit scores, along with some recommendations for credit cards it could help you qualify for, on Credit.com.)

4. … Fix it Up Before Inquiring

If your scores are less than stellar, you may want to try brushing them up before you call up your issuer. You can find 11 ways to improve your credit here.

5. Do Some Research

Are there other cards out there you qualify for that can offer you a better APR? If so, you can use this information to your advantage while negotiating with your current issuer.

6. Begin Negotiating With Your Oldest Card

Like we said before, your issuer might be willing to work with you, especially if you’ve been a cardholder for several years, so start negotiating with whichever card issuer you’ve been with longest to see if you can reduce your interest rate there.

7. Keep It Simple

It’s not a difficult process to ask for a decrease in your APR. In fact, it’s as simple as a call to the customer service line listed on the back of your card. Yes, they could say no, but that’s where your research will come in handy and you can …

8. Leverage Your Loyalty

If they say they can’t reduce your rate, remind them of how long you’ve been with the company, how you’ve never had a late payment or maxed out your card’s balance. Whatever positives you can cite can be helpful. If that doesn’t work, tell them what the other cards you’ve researched are offering. But most importantly …

9. Don’t Give Up Right Away

The old adage “if at first you don’t succeed, try, try again” is especially important here. Your issuer may say no, but that doesn’t mean you should give up. Call them multiple times, and ask to speak to a supervisor if their answer continues to be no. Of course, you’ll want to be polite throughout the process. If all of this doesn’t work, it’s time to …

10. Consider an Upgrade

A lot of card issuers have tiered credit card offerings, so you could potentially upgrade to a new card with the same issuer that offers a lower interest rate and transfer your current balance to that card.

11. Keep Watching Your Credit …

Just like when an issuer considers lowering your interest rate, which we mentioned above, they’ll likely check your credit as part of your application for a card upgrade. So, if you think there’s a better credit card available elsewhere, you might not want to ask them to upgrade you.

12. … & Limit Your Card Applications

In fact, every time you apply for new credit you’re going to have a hard inquiry and a ding to your credit scores. These can add up if you have too many in a short span of time and even impact your ability to qualify for a new card, so be very selective or you could end up hurting your credit. (You can read here about how often you can apply for new credit without hurting your credit scores too much.)

If you’ve tried all these steps with your current credit card issuer to no avail, it’s time to look at starting a new relationship with a new issuer.

13. Get a Balance Transfer Card

Let’s say you’ve tried everything to lower your current APR with your card issuer and they just won’t work with you. Perhaps you’ve had some late payments or you just haven’t been with them that long. Getting a balance transfer credit card could make sense for you.

14. Find an Introductory 0% APR

There are lots of options to choose from in the world of balance transfer credit cards with a low or even 0% introductory APR. Here’s how to find the right one for you …

15. Comparison Shop

You can start by checking out some of the best balance transfer credit cards and comparing what they offer.

16. Give Yourself Plenty of Time

There are balance transfer cards that offer as long as 21 months at 0% financing for balance transfers and even new purchases. If you have a lot of current credit card debt, that could be very beneficial to you, as you’ll eliminate your interest while paying down your principal.

17. Don’t Forget the Transfer Fees …

Of course, most balance transfer cards charge you a fee for transferring your balance – typically 3% to 5%, so be sure to compare those amounts as well.

18. … & the Annual Fees

Some cards also charge an annual fee, so you’ll want to consider that cost as well as you compare balance transfer offers.

19. Make Sure You Time it Right

If you’re looking at buying a new house, car or other major purchase anytime soon, you’ll want to time your credit card application with that in mind since your credit scores will be impacted by that aforementioned hard inquiry that takes place during your application process.

20. Include Your Balance Transfer Amount in Your Application

This can help ensure the transfer goes smoothly and quickly. The new issuer will reach out to your current card issuer once you’re approved and get the transfer process started right away, saving you the hassle of doing it later.

21. Pay Off Your Balance

Once you have your new balance transfer card, it’s important to focus your attention on getting that balance paid off before your introductory rate expires. Otherwise, your balance is going to revert to the standard variable rate.

22. Keep Your Old Card

No, keeping your old card isn’t exactly leaving it, but hear us out. You might be tempted to close your old card, particularly if your card issuer refused to reduce your APR when you transferred your balance, but keeping it open can be good for your credit score.

That’s because your credit scores improve the longer you have a credit account in good standing, so if you had a decent payment history, keeping that card open could really help. Moreover, your total credit line will be higher if you keep it open, also helping your scores. (You can find a full explainer on how closing a card can affect your credit here.)

Go ahead and cut it up, though, if it makes you feel better. That will also keep you from using it.

23. Keep Your New Interest Rate Low

Now that you have a card with a lower APR, even if it’s just an introductory rate, there are things you can do to keep your rate as low as possible. You’ll want to …

24. Make Your Payments On Time …

Late payments can send your APR soaring, so make all of your payments on time to avoid a penalty APR.

25. … & Keep Your Balance Low

If you can’t pay off your balance each month, at least try to make payments that keep your balance below 30% of your credit limit, though below 10% is even better if you want to do your credit scores a real favor.

26. Don’t Take Cash Advances

These usually come with a higher variable APR than purchases or balance transfers, so try to avoid them if you want to keep your rates down.

27. Try Some Other Alternatives …

If you’ve had a bad run financially and aren’t going to qualify for a credit card with a lower APR, you still have plenty of money-saving options, so don’t give up just yet. You have some alternatives …

28. Like a Personal Loan …

You may be able to pay off your credit card debt with a personal loan from your bank or credit union, but keep in mind that unless you have excellent credit, you’ll likely need some kind of collateral to secure it. Be sure to ask about the lender’s credit requirements before applying.

29. Or a Home Equity Line of Credit …

If you own a home and have some equity built up, this can be a great option for paying off debt at a lower interest rate. You can save a ton by moving your debt to a HELOC.

30. … But Don’t Spend Your Savings

Use the money you save by refinancing through a HELOC on creating an emergency fund (if you don’t already have one). Once that’s set up, you can use the money as prepayment against your home loan or to boost your retirement savings.

31. Consider a Debt Management Plan …

A debt management plan allows you to turn over all of your debt information to a credit counseling agency. You make one monthly payment to them, and they pay your credit cards and other debts for you. These plans usually last three to five years, and a lot of lenders lower your interest rates when you participate in such a plan. You’ll want to be sure to find a reputable credit counseling agency, so do your research.

32. … Or File for Bankruptcy

As a last-resort option, you can consider getting out from under your high-interest credit card debt by declaring bankruptcy. You’ll lower your debt and have many years to pay it off depending on the type of bankruptcy relief you file for. Just remember you’ll also have a major blemish on your credit reports for up to 10 years that could seriously affect your ability to get credit (in general and at n affordable rate) during that time. Still, if your debt is significant, this could be the right option for you. Talking to a credit counselor or bankruptcy attorney before deciding could help you make the right choice for your circumstances.

Have another question about credit card debt? Leave it in the comments section and one of our credit experts will try to get back to you.

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Guide to Credit Counseling: 7 Key Questions to Ask

It’s no secret that financial education is sorely lacking in the U.S. However, this does not mean that you can’t seek financial education from reputable sources. If you have little to no knowledge on the topic of personal finance and are struggling with your finances, then you may consider credit counseling.

Credit counseling can involve a variety of services including educational materials and real-world application to your finances. Credit counselors can help you to set a budget and advise you on how to manage debt and your money in general.

According to the Federal Trade Commission (FTC), reputable credit counseling organizations have certified counselors who are trained in consumer credit, money and debt management, and budgeting. Credit counselors will work with you to come up with an individualized plan to address the money issues you are facing.

Seeking credit counseling is typically voluntary but can be required when filing for bankruptcy. In this guide, we’ll answer some key questions you might have about credit counseling and whether it’s right for you.

How Do You Find a Credit Counselor?

Before settling on a credit counseling organization, do your homework to make sure they are not only reputable but will also be the most helpful for your particular financial circumstances. Check with your state’s attorney general and the consumer protection agency present in your state to see if there have been any complaints filed.

When looking for a good credit counseling agency, first ask about what information or educational materials they provide for free. Organizations that charge for information are typically more interested in their bottom line than helping you. Also, ask about the types of services they offer. Limited services can be a red flag. The fewer services they offer, the fewer solutions they may provide you.

You do not want to be pushed into a debt management plan simply because that is their top service. And make sure you understand the organization’s fee system, not only how much services will cost but also how employees are paid. If employees make more based on the number of services you receive, look for another credit counseling organization.

MagnifyMoney has come up with a list of some of the best credit counseling options, which are a great place to start. If you are looking for credit counseling as a pre-bankruptcy measure, the U.S. Trustee Program has a list of approved credit counseling agencies that can provide pre-bankruptcy counseling.

How Much Does Credit Counseling Cost?

Credit counseling can involve both start-up and monthly maintenance costs. The Department of Justice has said that $50 per month is a reasonable fee. Further, the National Foundation for Credit Counseling (NFCC) has suggested that a start-up fee should not exceed $75 and monthly maintenance fees should not be more than $50 per month.

Credit counseling agencies may offer fee waivers or fee reductions, depending on your income levels. Where credit counseling is required, the DOJ requires that if the household income is less than 150% of the poverty line, then the client is entitled to a fee waiver or reduction. While the poverty line varies depending on household size, it ranges from $11,880 for a single person family household to $24,300 for a family of four.

Other regulations, such as when fees can be collected and circumstances that would warrant fee reduction or waiver, may also be set forth by your state.

How Long Does Credit Counseling Last?

While the length of your credit counseling session depends on the complexity of your financial problems, sessions typically last 60 minutes. After the initial session, credit counselors will then follow up to ensure you understand the actions you needed to take and that you have been able to get started on the plan they developed. Another session may be necessary if you see a significant change to your financial situation.

What Do You Accomplish with Credit Counseling?

According to the NFCC, reputable counseling involves three things. First, a review of a client’s current financial situation. You cannot move forward unless you know where you are starting. Second, an analysis of the factors that contributed to the financial situation. You don’t want bad habits to undermine your progress. Lastly, a plan to address the situation without incurring negative amortization of debt. This gives you a place to start in improving your financial situation.

What Is the Difference Between Credit Counseling and Debt Management Programs?

A debt management plan is just one solution a credit counselor may recommend based on your financial situation. Having a debt management plan is not the same as credit counseling.

A debt management plan involves the credit counseling organization acting as an intermediary between you and your creditors. Each month you will deposit an agreed upon amount of money to your credit counseling agency, which will, in turn, apply it to your debts. The credit counseling agency works with your creditors to determine how the amount will be applied each month as well as negotiates interest rates and any fee waivers. It’s important to call your creditors directly to check whether they are open to negotiating interest rates or offering waivers for fees. In some cases, a credit counseling firm may promise to negotiate those things for you but be stonewalled when they discover a creditor isn’t even open to the discussion.

Before agreeing to a debt management plan, make sure you understand any fees associated with the debt management plan and any choices you might be giving up. For example, some debt management plans may have you agree to give up opening up new lines of credit for a specified period of time. Remember that a debt management plan is just one of many solutions a credit counselor may advise you to consider.

How Does Credit Counseling Impact Your Credit Score?

Not directly. While the fact you are in credit counseling may show up on a credit report, that fact does not affect your score. The actions you take as a result of credit counseling can impact your score. For example, if you don’t choose a reputable credit counseling agency, the agency may submit the payment on your behalf late to your creditors, which can damage your credit score. So even though you submitted your payment on time to the credit counseling agency, it is possible that the credit counseling agency will issue a late payment on your behalf. This is why it is important to make sure you use a reputable credit counseling agency.

Who Should Consider Credit Counseling and When?

While credit counseling is sometimes required, like in instances of bankruptcy, you always have an ability to seek credit counseling. Bankruptcy attorney Julie Franklin, based in Boston, Mass., explains, “For bankruptcy purposes, there are two course requirements — a debtor must complete the first credit counseling course prior to filing and obtain a certificate that is filed with the court in their initial bankruptcy petition documents. Post bankruptcy filing, the debtor is required to take a second course, and upon completion, the certificate that is issued must be filed with the court in order for the debtor to obtain an order of discharge.”

Anyone struggling with personal finance should consider credit counseling as a viable option so long as they use a reputable credit counseling agency. Franklin also notes that “the first credit counseling course is a tool for debtors as it compels the individual taking the course to closely examine the household assets, income, liabilities, and spending habits to determine if there’s a way to ‘save’ the debtor from having to file bankruptcy.” If you are considering bankruptcy, you will have to attend some credit counseling anyway, but it could also help you to avoid filing for bankruptcy.

Voluntary credit counseling might not help if you are already being sued to have a debt collected. However, you may be able to negotiate terms with the debt collector that result in a withdrawal of the suit if you agree to enroll in credit counseling and possibly a debt management program. Not all creditors will agree to such terms, but it is possible.

The post Guide to Credit Counseling: 7 Key Questions to Ask appeared first on MagnifyMoney.

Help! My New Spouse Didn’t Tell Me About a Bankruptcy

bankrupt-spouse

Q. I just got married, and my wife just told me she had a bankruptcy three years ago when we first met. She never told me this before. What will this mean for us buying a house or a car and our financial future? (I’m not happy about this…)
— New husband

A. It’s so important for spouses to be honest with each other about money.

You’re working as a team, and your individual financial pasts will impact what you’re able to do in the future.

Your first inquiry should be under which chapter your wife filed for bankruptcy, said Ilissa Churgin Hook, a bankruptcy attorney and member of Hook & Fatovich in Wayne, New Jersey.

Hook said if she filed a Chapter 7 case and received a discharge, her case would most likely be closed by now.

However, if your wife filed a Chapter 13 case and confirmed a five-year payment (personal reorganization) plan, she would still be a debtor in a pending bankruptcy case, Hook said.

“If your wife is still in an active Chapter 13, she will need to obtain bankruptcy court approval in connection with any proposed financing, including a mortgage or a car loan,” Hook said.

Assuming that your wife filed a Chapter 7 that is closed, her credit score should actually be increasing gradually as she makes timely monthly payments to her creditors, Hook said.

“The idea behind a bankruptcy discharge is to give a debtor a `fresh start’ financially,” she said. “If your wife has a car loan or credit cards and is current with her payments, her credit score is already being rehabilitated.

Hook said a bankruptcy filing stays on one’s credit report for 7 to 10 years, but in view of the large number of foreclosures and resulting bankruptcy filings in recent years, a Chapter 7 bankruptcy filing does not, generally speaking, carry the same stigma as it once did.

“A prior Chapter 7 filing does not automatically mean that your wife will not qualify for a mortgage or a new car loan, however, it may mean that she will pay a higher interest rate than someone with a higher, unblemished credit score,” she said.

Assuming that you and your wife desire to buy a home together, and both plan to be on the deed and mortgage, both of your credit scores and histories will be considered by potential lenders when you apply for a mortgage, Hook said. Other events that can negatively affect one’s credit score include, but are not limited to: late payments, a prior foreclosure or auto repossession.

“I recommend that you both run your credit reports to see what is on there, as well as discover your current credit score prior to applying for a mortgage,” Hook said. “If it turns out that your credit score is significantly higher than your wife’s, you may desire to speak to a real estate attorney regarding the pros and cons of different options, such as putting the deed in both names, but with only your name on the mortgage.”

Image: Neustockimages

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Yes, You Can Get Rid of Your Student Loans Through Bankruptcy. Here’s How

student_loans_bankruptcy_discharge

The belief that student loans are never dischargeable in bankruptcy is, simply put, not true. Student loans can be discharged in some limited cases. In fact, according to a study published in 2011 by Jason Iuliano, a student at the Woodrow Wilson School of Public and International Affairs at Princeton University, at least 40% of borrowers who include their student loans in their bankruptcy filing end up with some or all of their student debt discharged.

The problem, as Iuliano points out, is that only about 0.1% of consumers with student loans actually try to include them in their bankruptcy proceedings.

While we’re not advocating for shirking your legal responsibility to repay money you’ve borrowed, bankruptcy is sometimes a necessary part of our financial lives. If that’s the case for you, you could be eligible to include any outstanding student loan debt within your bankruptcy filing. Here’s how.

Is Bankruptcy Your Best Option?

Bankruptcy is an available option for a reason, so if you find yourself at the end of your financial rope, don’t be afraid to consider it. A consumer bankruptcy attorney can help you understand how filing for bankruptcy may help you. You may also want to talk with a credit counseling agency to ensure you’ve exhausted your other options, because bankruptcy can have a devastating impact on your credit scores that will take years to improve.

Do You Pass the Brunner Test?

Bankruptcy law currently exempts education loans and from discharge unless not doing so would cause the consumer undue hardship. But undue hardship is not defined, so individual courts are left to decide what that entails.

Most courts (but not all) use the Brunner test to determine undue hardship, using three criteria to do so. First, can the borrower sustain a minimum standard of living while continuing to pay the loan? Second, will the borrower’s financial situation improve in the future? And third, has the borrower made a good-faith effort to pay his or her loans?

If you can answer no to all three of these questions, you may wish to discuss with your bankruptcy attorney whether you should file an adversary proceeding, which is basically a lawsuit within the bankruptcy case itself. And remember, even if you don’t meet the Brunner test criteria, it might be possible to discharge your other debts, which can free you up to pay your student loans.

Review Other Discharge Strategies

If it’s your student loans that are causing you the most concern, you might want to first consider some of the available student loan forgiveness programs available. Loan forgiveness programs are offered to everyone from Peace Corps and AmeriCorps volunteers to teachers, nurses, doctors and other young professionals serving communities in need. Professionals choosing to work such jobs may take home lower-paying salaries, but they’ll also get some serious help with their student loans.

There are also many ways to get federal student loans forgiven. In fact, the Consumer Financial Protection Bureau released a report in 2013 estimating that more than one-quarter of working Americans are eligible for the Public Service Loan Forgiveness Program, but only a small percentage are actually using it.

Know the Impact On Your Credit

Whatever option you choose to rectify your financial situation, it’s important to know how your choice will impact your credit. If you choose bankruptcy, there are steps you can take to avoid a long-term worst-case scenario, including:

  1. Make sure the bankruptcy is reported correctly. In order for the healing process to begin, make sure all the accounts included in your bankruptcy are marked as discharged and labeled with a zero balance on all of your credit reports. You can check your credit reports for free by pulling them at AnnualCreditReport.com.
  2. Start establishing a positive payment history. Payment history is generally the most important factor among credit scoring models, so it’s imperative you demonstrate an ability to repay loans as agreed. One possible approach to re-establishing credit is to apply for a secured credit card and continually make all of your payments on time. You can also monitor your progress as you try to fix your credit by viewing your two free credit scores, updated each month, on Credit.com.
  3. Get the bankruptcy removed from your credit reports as soon as it’s eligible for deletion. If your bankruptcy is appearing on your report after that 10-year mark, you can dispute its inclusion with the credit bureaus. You can go here to find out more about getting errors off of your credit reports.

[Offer: Your credit score may be low due to credit errors. If that’s the case, you can tackle your credit reports to improve your credit score with help from Lexington Law. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

More on Managing Debt:

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Worst-Case Scenario: What Does a Late Payment Do to My Credit Score?

Missing a single loan payment may seem like a small faux pas, but it can actually do big damage to your credit score, particularly if it’s your first slip-up.

A 30-day late payment can lower a good credit score of 780 by 90 to 110 points, according to a study by major credit scoring model FICO; and an average score of 680 can drop by 60 to 80 points.

In a best-case scenario, you’ll be able to resume good payment behavior and see your score rebound.

“When an account is brought current and is once again reflecting positively on the credit report, the score should immediately begin to rebound and improve over time, as long as there are consistently on-time payments and no balance increases or credit applications,” Barry Paperno, a credit scoring expert who worked at FICO for many years and now writes for SpeakingofCredit.com, said in an email.

Negative information can generally take up to seven years to age completely off of a credit report. (Bankruptcies can take up to 10 years. You can go here to see what a worst-case scenario bankruptcy could do to your credit.) However, Paperno said, a consumer could see their score return to its pre-late-payment days in a few years.

In a worst-case scenario, one late payment will lead to bigger credit woes.

“For most consumers, a single or occasional late payment shouldn’t trigger additional score drops,” Paperno said. “Yet if the late payments continue, multiple late charges can raise a [credit card] balance by enough to also raise the credit utilization percentage — and lower the score further. Eventually, left unpaid, the debt can be assigned to a collection agency and/or lead to a court judgment, each of which can add to the damage.”

Given that payment history is the most important factor among credit scoring models, you’ll want to get ahead of any problems that could arise by missing a bill (or two or three or four).

When to Contact Your Creditor

If you accidentally missed a payment and your history was pretty stellar up until that point, you can contact your issuer to see if they’ll give you a pass and refrain from reporting the incident to the credit bureaus. They may also be willing to waive the late fee.

If you know you’re unable to make payments on a loan indefinitely (or at all), you can contact your issuer to see if you can work out a payment plan.

Settling with the creditor is likely to still affect your credit, but could prove less costly than letting a defaulted loan go to collection or judgment. (You can find tips for negotiating with a creditor here.)

If your credit has already been damaged by a missed payment, you may be able to improve your score by paying down high credit card balances, disputing errors on your credit report and making all future loan payments on-time. You can track your progress as you work to rebuild your credit by viewing your two free credit scores each month on Credit.com.

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Worst-Case Scenario: What Does Bankruptcy Actually Do to My Credit Score?

Help! Do I Have to Go Through Foreclosure After Bankruptcy?

It’s the big, bad boogeyman of credit scores: bankruptcy. A formal declaration that you are incapable of paying off all your debts as agreed. And while taking such action could spare you from paying off all — or at least some — of the loans that put you so badly in the red, you can expect your credit to take a pretty big hit.

“Consumers should be aware that declaring bankruptcy has the greatest single impact on credit scores,” Rod Griffin, Director of Public Education at Experian, said in an email. “When you declare bankruptcy, you take legal action so that you do not have to repay your debts, or only have to repay a portion of them. While you are no longer responsible for your debts, the fact remains that you did not pay them.”

But how badly can this hurt you? Here’s how bankruptcy actually affects your credit scores.

What’s the Damage?

It can be hard to pinpoint exactly how much of hit your score will take once bankruptcy appears on your credit report. That’ll vary depending on what else is on your report and where your score stands at the time. But, generally speaking, the higher the score, the harder the fall.

“Someone with a high FICO score (mid 700s or above) could see their score drop as much as 200-plus points as a result of a bankruptcy posting to their file,” Ethan Dornhelm, a principle scientist for the popular credit scoring model, said in an email. Someone with a more average score of 680 could experience less of a drop (between 130 and 150 points, FICO found). But, in all scenarios, you’ll likely find yourself saddled with bad credit (think below 600) post-bankruptcy.

How Long Will My Score Be Depressed?

Here’s even more bad news for those who file bankruptcy. “bankruptcy can remain on your credit report for 10 years, and can affect your ability to obtain credit during the entire time,” Griffin said. (Note: The major credit reporting agencies will typically remove completed Chapter 13 cases seven years from the filing date.) And your score will also be subject to any negative occurrences that happened before you filed.

“If the accounts included in bankruptcy were delinquent at the time of filing, they will be deleted seven years from the original delinquency date,” he said. “The original delinquency date occurred before the bankruptcy, so the accounts will be deleted before the bankruptcy public record.”

The good news is your score should start to rebound almost immediately after the bankruptcy hits your report, assuming no new negative information arises, of course.

“FICO research found that for a representative consumer with a 680 FICO score (before the bankruptcy filing), it would take them roughly 5 years to return back to that same score level,” Dornhelm said.

While that score won’t help you qualify for the best terms and conditions, it could be enough to net future financing. (Mortgage experts, for instance, peg the the minimum credit score requirements for conventional home loans at around 620.)

And there are some steps you can take to avoid a long-term worst-case scenario, including:

  1. Make sure the bankruptcy is reported correctly. In order for the healing process to begin, make sure all the accounts included in your bankruptcy are marked as discharged and labeled with a zero balance on all of your credit reports. You can check your credit reports for free by pulling them at AnnualCreditReport.com.
  2. Start establishing a positive payment history. Payment history is generally the most important factor among credit scoring models, so it’s imperative you demonstrate an ability to repay loans as agreed. “One possible approach to re-establishing credit is to apply for a secured credit card and continually make all of your payments on time,” Dornhelm said. “As time passes and the impact of the bankruptcy lessens, you might apply for a traditional credit card and also continually make all of your payments on time.” You can also monitor your progress as you try to fix your credit by viewing your two free credit scores each month on Credit.com.
  3. Get the bankruptcy removed from your credit reports as soon as it’s eligible for deletion. If your bankruptcy is appearing on your report after that 10-year mark, you can dispute its inclusion with the credit bureaus. You can go here to find out more about getting errors off of your credit reports.

[Offer: If you’re worried about errors on your credit reports and you don’t want to go it alone, you can hire companies – like our partner Lexington Law – to manage the credit repair process for you. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

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Bankruptcy May Be an Option to Discharge a Portion of Student Loans

Depressed man slumped on the desk with his hands holding credit card and currency

The common message to student loan borrowers is that any loan taken out will have to be repaid in some way because student loans cannot be discharged in bankruptcy. So no matter how dire the situation gets, you’ll be expected to pay back your student loans. But is this really the ultimate truth or is it possible to discharge some of your student loan debt in bankruptcy? 

Quick student loan overview

Student loan debt comes in many forms, primarily being split between government and private loans. Government loans are provided to students with the full financial backing of the Federal government. With this backing, many government loans have favorable interest rates, recently not rising above 7%. Other loans are issued privately, either through banks or loan companies. As these do not have government sureties, terms are less favorable, meaning interest rates are often higher and loan terms far shorter.

But I thought student loans wouldn’t get discharged through bankruptcy? 

For those looking at the possibility of bankruptcy, the myth that student loans are non-dismissible has been paraded around for a while. This myth may be behind the findings that less than 1% of bankruptcy filers included their student loans in their debt to be discharged, even though 40% of filers would have been eligible for at least a partial dismissal. For many filers, a lack of income can lead to some of their loans being discharged.

With this myth being discredited, it could still lead to some filers not being able to get a full or partial dismissal, as their income may disqualify them because it’s too high. However, even though they may be earning an adequate income, the burden of paying their student loans may be ever present. For filers to be aware of where they stand, they need to see if they pass the Brunner test.

Learn more about the Brunner test here: 8 Steps for Possibly Discharging Your Student Loans Through Bankruptcy

If a filer doesn’t pass the Brunner test, he or she may still have another option available.

Discharging living expenses covered by student loans

This method requires that a lot of boxes be checked, but if they are, then a large portion of loans can be discharged.

Should it be determined that the student loans were used to pay for living expenses while in college, and the loans were made improperly, this may hit a grey area in Higher Education Act. An “improper” student loan could be one made to a student who wasn’t an eligible student of an institution, or the school wasn’t eligible for financial aid and shouldn’t have issued a student loan. These arguments have been made and won from a student of a flying school and a student of a training institute.

According to the law, student loans should be used for cost of attendance and not for living expenses. Even though a student has signed a contract stating it will be used for these purposes, if a loan was made improperly, then it can nullify the contract leaving the loan open to being discharged. What qualifies for a qualified education expenses or not, requires an audit of everything the loan was spent on. This method can prove to be hard especially if receipts were not kept, and notes of when and where the student loan was spent.

It’s far more likely for loans to be discharged due to improper issuance, so seek to understand your situation fully to see if you qualify.

Where do I go from here?

If you’re finding yourself looking at bankruptcy and want to see if you can get your living expenses discharged, or even your entire loan, you need to research the school / college you attended to understand if it was accredited at the time you attended. Then seek to understand what amount of your loan was spent on qualified expenses versus living expenses. By knowing these two types of information, you can approach your bankruptcy proceedings and use one or both of these methods to try and eliminate your debt.

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Is Bankruptcy the Answer to My Debt Problem?

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Q. I can never seem to get ahead of my credit card debt. At what point should I consider bankruptcy? — Falling behind

A. You’ve got plenty of thinking to do before you turn to bankruptcy.

First, you need to take a close look at your budget.

If you have a regular source of income, you need to determine how much monthly excess income you have to dedicate to credit card payments, said Ilissa Churgin Hook, a bankruptcy attorney with Hook & Fatovich in Wayne, N.J.

“Many people are surprised when, after taking the time to prepare a written budget, they see on paper how much money they are spending on ‘extras,’” Hooks said. “Perhaps you have room to reduce your discretionary spending in order to dedicate more money to paying off your credit card debt.”

(You can see how long it will take you to pay down your credit card debt using the Credit.com credit card payoff calculator.)

If you can’t find savings in your budget, or if it will take you many years to pay off the debt while interest and fees continue to accrue, you may want to consider a bankruptcy filing.

You first need to decide which chapter(s) of the bankruptcy code you qualify for, and which chapter is best for you. That determination will require a complete analysis of your assets, liabilities, income and expenses, Hook said.

Most individuals seek relief either under Chapter 7 or Chapter 13 of the United States Bankruptcy Code, Hook said.

“Generally, in a Chapter 7 case, a debtor seeks a discharge from his/her debts in exchange for exposing his/her assets to an examination by a third-party Trustee, who acts as a fiduciary for creditors,” Hook said.

One of the Trustee’s obligations is to look for assets that have equity — after taking into account the costs of sale, any liens against the asset, and any relevant bankruptcy exemptions — that can be liquidated to pay creditors, she said.

That means you need to consider if any of your assets would be at risk — liquidated by a trustee — if you were to seek a Chapter 7 discharge of your debt, Hook said.

Hook said that you can only receive a Chapter 7 discharge (pursuant to which the credit card debt would be discharged or “wiped out”) once every eight years. Therefore, you need to consider whether you should use that opportunity now, or wait.

Further, not all individuals qualify for Chapter 7, depending on household income and expenses, she said.

In a Chapter 13 case, an individual or a married couple with regular income can reorganize his/their debts while retaining assets, Hook said.

“A Chapter 13 case usually lasts three to five years and allows a debtor to repay his/her debts over time via a court-approved payment plan,” Hook said. “The length of the Chapter 13 plan depends on the debtor’s income and ability to make monthly payments.”

She said additional interest on unsecured debts such as credit cards and medical bills does not accrue during the life of the Chapter 13 plan.

A Chapter 13 debtor must demonstrate to the court that he/she can pay monthly expenses including rent/mortgage, utilities, food, auto expenses and more as they become due, and have a surplus to dedicate to paying at least a portion of their old debt.

Hook recommends you consult an experienced bankruptcy attorney regarding all of the relevant facts of your specific situation.

You should also look into a reputable credit counseling firm, which may be able to help you create a debt repayment plan without a bankruptcy. (Editor’s Note: A bankruptcy will impact your credit for years, depending on which type you opt to use, but your credit score will recover over time. You can monitor your bankruptcy’s affect on your credit scores for free on Credit.com.)

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