Student Loan Dodgers

When you leave college with a mountain of debt, it’s easy to consider filing for bankruptcy as a way to get out from under some of your obligations. Students may not realize, however, the impact that bankruptcy has on their credit.

Bankruptcy laws have changed in the United States and it is now more difficult for individuals to declare personal bankruptcy than it was in the past. Bankruptcy is a declaration that you do not have, nor do you expect to accumulate, sufficient assets to repay your obligations. People declare bankruptcies for many reasons. Unexpected health crises, divorce, death of a spouse, failure of a personal business, gambling losses, employment loss and unchecked spending are some of the more common reasons people choose to declare bankruptcy.

Certain types of debt are not normally dischargeable through bankruptcy. Adverse court judgments, delinquent taxes and student loan debt are examples of obligations that cannot be erased by a declaration of bankruptcy. Regardless of whether the student loan debt is federally subsidized, unsubsidized or entirely private, declaring bankruptcy will have no impact on your student loan debts. When everything is said and done, you’ll still owe just as much as you did before you declared bankruptcy.

You may be tempted to declare bankruptcy early in your career, using the rationalization that you’ll recover more quickly from your past financial misdeeds if you start with a clean slate. This isn’t true. A declaration of bankruptcy will damage your ability to get car loans, mortgages and in some cases, a good job for as many as 10 years after you file. Never enter into a declaration of bankruptcy lightly. Ordinary adverse information (and good information, too) stays on your credit report for seven years. You’ll recover more quickly if you take your lumps and repay your debts than you will if you declare bankruptcy. In the process, you’ll rebuild your damaged credit rating, too.

As a side note, debt repayment is really the only way to repair a damaged credit rating. Regardless of what someone promises you, there’s no easy way to “fix” bad credit, except by repaying your debts and developing financially responsible spending habits. Do not give in to the temptation of paying someone to fix your credit rating for you. The only person who can fix your bad credit is you!