Bankruptcy Didn’t Do It the First Time – Can I Try Again?


 Bankruptcy is the first topic for our 'Private Questions Go Public' series. And if you want more on this topic, read our new Student Loan Bankruptcy Q + A (Basic) 

I went bankrupt in 1999 or 2000. At the time I claimed both my student loans but of course they weren't wiped out. Now that 10 years has gone by and I am still paying for them how to I go about looking into having them discharged... more importantly what will it do to my credit now?
I have re-established my credit almost 11 years later. I am jointly on title to my home and I am working. I don't want to damage my credit rating but with the  [$ amount removed for privacy] each month that I am currently paying, I will still be paying for another 5 years. Any suggestions?
Jeannine Mitchell answers:
OK, I’m guessing you weren’t out of school long enough at the time of your bankruptcy to include the student loans. Presumably, you’ve been out of school longer now and also, the time period is shorter under the new rules. So I can see why you’re wondering about this.
I don’t know if you are in default (paying a collection agency) or what your income is. But if you tried to declare the loans in your bankruptcy I'm guessing they are in default and thus not eligible for aid programs like RAP unless you get out of default first. To get out of default you normally must first pay off all outstanding interest, which for old student loans is usually too much money for people who need aid.
Your options may be greater if you are not in default. The fact that you’re now working and sharing title to a house suggests that your income may be too high for repayment aid programs such as RAP. But you should check in case you are indeed eligible for some aid and therefore could get help without a bankruptcy.
Of course, if you are working and on title to a house, you also might not qualify for bankruptcy at this point. Again, we don’t know your actual details, so don’t drop the idea without checking with a bankruptcy trustee. The current time line on student loans, by the way, is that you must be out of school for the past 7 years in order to apply (or 6 years in cases of extreme hardship, which does not sound like your situation).
Read our articles if you want more detail on these bankruptcy rules, which changed after you declared bankruptcy. Just do a search of our site with “bankruptcy” in that box in top right corner.  Here are some examples of these articles:
But you also ask about the effects of a bankruptcy on your credit, so let’s consider that.
Even if you did qualify for bankruptcy without risking your assets, you might not find it worth it. You’d mess up your credit rating for another 6-7 years - after the time it’s taken you to build it up again. And consider any consequences if your mortgage has a shorter term than the time needed to rebuild your credit (most people have 3 or 5 year terms). You don't want problems renewing your mortgage. A financial planner might have further thoughts on this.
So if the positive changes in your circumstances mean you must keep carrying this debt, think of ways to make it less costly or difficult. Paying faster will cut your interest costs because every extra dollar will go toward the principal.
You may or may not be able to pay faster. If you can’t (perhaps because you’re struggling to pay your mortgage), consider whether your student loans are upsetting to manage. By this I mean confusing rules, bureaucratic or call centre errors, rude collection agents and so on. If these loan management issues get you down, consider rolling your student loan debt into the mortgage next time you renew  your term. Or consider using your home equity line of credit to pay off the student loans, or perhaps just the one that causes more problems.
Unless you have a super-low mortgage interest rate, rolling your loan debt into your mortgage would cost you more in the long run. That’s because the longer amortization time would raise your interest costs. But this strategy would let you reduce your monthly payments and would end the stress of managing student loans.
Caution: I don’t have enough detail about your situation, and don’t want to steer you the wrong way. For example, if you are not in default, student loan repayment aid could help keep you out of trouble if you lost your job and then qualified for help.
So if you are not in default, I would not advise rolling your loan debt into a mortgage. That’s would make you permanently ineligible for repayment aid on these student loans.

 © Jeannine Mitchell 2010 - 2012