My son is a senior in high school this year. I might have to file
for bankruptcy. Should I file this year or wait until next year to file?
— Rich N.
Filing for bankruptcy will affect your eligibility for the Parent PLUS
loan and your ability to cosign or borrow a private student loan. It
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will not otherwise affect your son's eligibility for student financial
You will be ineligible for the Parent PLUS loan for five years after
you file for bankruptcy. Borrowers of the Parent PLUS loan must not
have an adverse credit history, which is defined as a five-year
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lookback for certain derogatory elements of the credit history, one of
which is bankruptcy. However, it is not unusual for people who are
contemplating bankruptcy to already be ineligible for the Parent PLUS
loan for other reasons. For example, the definition of an adverse
credit history includes having a current delinquency of 90 or more
days on any debt. But if a delinquency is the only reason why you are
ineligible for the Parent PLUS loan, you could potentially regain
eligibility by bringing that debt current.
If you are denied a Parent PLUS loan, your son will be eligible for
higher unsubsidized Stafford loan limits, the same limits available to
independent students. Unfortunately, these loan limits aren't much
higher than the limits available to dependent students. The annual
loan limits are $4,000 higher during the freshman and sophomore years
and $5,000 higher during the junior and senior years. This falls short
of the amount of money you could have borrowed through the Parent PLUS
loan, which has an annual loan limit of up to the full cost of
attendance minus other aid received. The average Parent PLUS loan in
2007-08 was $10,753. Families who borrowed from the Parent PLUS loan
program had a total of $14,847 in Title IV federal education loans,
including subsidized and unsubsidized Stafford loans. This is $6,931
more than the $7,916 in total Title IV federal education loans among
families who were ineligible for the Parent PLUS loan.
A bankruptcy will make you ineligible as a cosigner or borrower on
most private student loans for 7 or 10 years. Lenders previously would
make occasional exceptions when a bankruptcy was due to circumstances
beyond the family's control and those circumstances were unlikely to
recur. However, credit underwriting has become more restricted since
the start of the subprime mortgage credit crisis, so an exception is
Note that federal and private student loans are generally not
dischargeable in bankruptcy. Only borrowers who can demonstrate undue
hardship in an adversarial proceeding can get their student loans
discharged, and even then very few are successful in obtaining a
discharge. As one judge put it, there must be a "certainty of
hopelessness" for a borrower to qualify for an undue hardship
discharge on his or her student loans.
If you want to stop the harassing telephone calls, read the Federal
Trade Commission's summary of the
Fair Debt Collection Practices Act
This will end most of the harassment, although you will still owe the
Consider alternatives to bankruptcy if your debts represent a small
fraction of your income. While bankruptcy wipes the slate clean, it
also makes it very difficult for you to get credit for 7 to 10
years. You will find it very difficult to get a credit card, auto loan
or home loan after you file for bankruptcy. Sometimes restructuring
your finances can help you pay off your debts. Bankruptcy attorneys
earn a living by helping people file for bankruptcy; they aren't
necessarily going to help you avoid filing for bankruptcy. Also, if
you file for bankruptcy without learning how to manage your money
better, you may eventually end up in the same situation or worse.