Faced with student loans, living expenses and credit cards, students often feel their debt is too overwhelming to handle. Bankruptcy may seem like a way out of this mess, but is not always the right choice for everyone.
“I’m hesitant to recommend (bankruptcy) to a student, because until they get out into the work force, we can’t tell if they’re going to make it,” attorney Edward Hill said.
Hill, a University School of Law graduate, said when students are considering bankruptcy, it is important to look at a credit report to determine if the student’s credit is already ruined or if there is just too much debt. This helps determine if bankruptcy should be regarded as an alternative.
But attorney John Henderson says bankruptcy can help students get a fresh start.
If a student goes bankrupt, this will show on their credit. But, Henderson said, this can actually be better than doing nothing.
“It’s the first step in resurrecting their credit,” he said. “Bankruptcy is there to offer a fresh start.”
Paying bills late — not going bankrupt — is what gives destroys people’s credit, he added.
Henderson said that a different option to bankruptcy is consumer credit counseling. This involves bargaining with creditors to attempt to reduce debts owed.
Debt Reduction Services branch manager Timothy Carson said debt reduction is a great alternative to bankruptcy because once the debtor has paid on all outstanding accounts, his or her credit rating will be restored. With bankruptcy, it can take seven to 10 years to restore one’s rating.
Carson said DRS doesn’t barter with creditors for the amount owed; it works with those companies to reduce interest rates and stop overlimit and late fees.
“We start with (the debtors’) budget and go from there,” Carson said.
Many clients come in with tunnel vision, thinking it’s the end of the world because they are so far in debt, Carson said. But often someone else can look at their budget and find a way to better manage their money, and the client leaves happy, Carson said.
As long as the debtor has the ability to make payments, debt reduction will likely work as an alternative to bankruptcy, Carson added.
If a student does go bankrupt, it does not mean that student loans will be forgiven. There are three types of debt — priority, unsecured and secured. Student loans are priority debt; secured is debt that is connected to property. The only kind of liability that is discharged in a bankruptcy is unsecured.
Hill said it is just as common to see parents who have co-signed student loans for their children to have financial trouble because their children are in default. He said creditors will usually look to the student first, but in the end they don’t care who repays the loan.
Hill added that many creditors practice illegal debt collection by threatening debtors with jail.
ASUO Legal Services Attorney Ilona Koleszar said they do not offer bankruptcy services for students because it is very labor-intensive and time-consuming. They do, however, have a book of local contacts available for more information on bankruptcy, she said.
For more on debt reduction, visit www.debtreductionservices.com.