Student loan debt is perhaps the most common form of debt in the United States in 2021. While debt in general has become a more common problem for adults in recent years, student loan debt has increased disproportionately. With the skyrocketing cost of higher education has come a correlated boom in student loan debts, as more and more young adults are forced to rely on these loans to obtain an education. Even when accounting for inflation, the cost of tuition and related educational expenses has more than doubled since 1970 in both public and private universities.
This means that people are graduating from college with an amount of debt equal to a down payment on a house, a brand-new car, or other major expense – which leaves them choosing between repaying these debts and paying for these necessities.
In fact, while the percentage of people who are past 90 days delinquent on most other types of debt has decreased over the last five years, student loan debt delinquency is climbing. As such, financial issues like bankruptcy often coincide with outstanding student debt. However, that can get complicated when determining whether your outstanding debts are secured or not.
Here’s a little bit more about the student loan crisis in America – and what it means for adults facing bankruptcy.
No other type of debt has increased with the speed of student debt over the past decade. Nearly 45 million American adults now carry outstanding student debt, with that debt totaling well over 1.5 trillion dollars. That number means that about one in every four American adults has student loan debt, making it a very common problem. The average amount of debt per person related to education is quickly nearing $40,000 and the typical monthly payment for those who are able to make these payments is around $400.
However, many Americans cannot make these payments. When this happens, bankruptcy might be a consideration – but will a bankruptcy actually help with student loan debt? To understand that, it is important to know the difference in secured and unsecured debt.
In the minds of most, debt is debt. However, there are differences in how debt is guaranteed – and that can make a big difference in terms of how it will be repaid or forgiven in a bankruptcy.
In the simplest terms, unsecured debt has no collateral guarantee, while secure debt does. Collateral is a form of backing that helps to guarantee the repayment of debt. In many cases, the only way to obtain a loan or line of credit without collateral is to have excellent credit. This helps put the creditor’s mind at ease about how trustworthy the borrower is in terms of repayment.
Unsecured debt carries a much higher risk of default and nonrepayment than secured debt, since the borrow has less to lose personally. To collect outstanding unsecured debts, a lender typically must take legal action. Some common types of unsecured debt includes bank loans, medical debt, and outstanding credit card balances.
Often, unsecured debt carries large interest rates to offset the risk sustained by the lenders. These lenders are also often very large entities which can afford the risk that they take when issuing these lines of credit. But for the consumer, repaying these debts can be difficult – especially if they amass a large amount of them.
With secured debt, the instance of nonrepayment is often much lower because of the fact that borrowers have to put up some form of collateral to guarantee these loans. Common examples of this type of debt include mortgages and auto loans. In these cases, the item being paid for with the loan is typically the collateral. This means that if loans are not repaid, the home or automobile can be repossessed.
While secured debt is less commonly defaulted on, it is still common enough that millions of cases of repossession happen annually. Debt is something that many people struggle to get under control once it begins to mount, and student loan debt is perhaps one of the greatest sources of this snowballing debt.
So, are federal student loans secured or unsecured debt? The simple answer is that they are unsecured; you do not have to surrender any type of collateral to take out a federal student loan. However, the rules for repayment – and the rules when it comes to how student loan debt will be treated during a bankruptcy – are different than they are for other types of unsecured debt.
Student loan debt may not be as easy to discharge during a bankruptcy as other types of unsecured debt. While things like credit card debt are much easier to have forgiven and discharged entirely, doing so with student loan debt requires credible proof of financial hardship. This means more than just struggling with debt. You’ll be responsible for demonstrating the circumstances that led to your struggle, which may include anything from a major illness or injury to a natural disaster or even a job loss. Whatever has caused you and your family to be unable to repay these loans, you’ll have to show proof of that in court.
These stringent rules do not mean that you should elect to ignore your student debt during your bankruptcy preparations. As they are backed and disbursed by the federal government, federal student loans have non statute of limitations. This means that you could still be on the hook for your student loan debt in fifty years, while credit card and other types of unsecured debt will generally be wiped from your record after anywhere from three to ten years. As such, it pays to pursue every possible avenue for repayment of these loans, whether that means bankruptcy or something else entirely.
For more information on student loan debt as it relates to Florida bankruptcy, contact the knowledgeable staff of the Van Horn Law Group. Their expertise will help you navigate the process of filing for bankruptcy and finding the best approach for getting out from under the weight of your student loan debt.
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