Filing for bankruptcy is a serious financial move that, to most people, is devastating to your overall credit profile. However, bankruptcy can make financial sense when you are unable to keep up with your outstanding debt due to unforeseen circumstances.
Bankruptcy essentially wipes the slate clean, eliminating balances you owe to certain creditors or creating a new, manageable payment plan for the debts you still owe. In most cases, student loans cannot be discharged in bankruptcy – although in some cases it can be.
If you are not one of these borrowers, however, it can still be a struggle to manage student loans after bankruptcy. Through refinancing or consolidation, you may have an opportunity to restructure your student loan debt to make it more manageable over time, but there are several factors to consider in the process.
Why a Bankruptcy Makes It Tough to Refinance
Refinancing your student loan debt post-bankruptcy might be a smart option for those who qualify but still find it difficult to keep up with on-time monthly payments. This is because refinancing allows you to extend the repayment term on your eligible student loan balances, creating a lower monthly payment over a longer period. Refinancing may also provide a way to lower the total cost of borrowing via your loan interest rate. Although beneficial, refinancing after bankruptcy might not be an option.
Filing for bankruptcy does a number on your credit, for the worse, but the severity of the impact depends heavily on how strong your credit was prior to filing. Individuals who have several delinquent accounts to begin with, or a high debt-to-asset ratio, your credit score may not have been all that great to start with.
Bankruptcy will not do much more harm if your credit score is already in the low- to mid-500s. However, if you had strong credit beforehand, your credit score is likely to drop several hundred points after bankruptcy. Because nearly all private student loan lenders look to a borrower’s credit score and history as part of the application process for a refinance, a low number and a recent major negative event like a bankruptcy could mean trouble for getting approval.
Lenders Who Might Let You Refinance After Bankruptcy
Although filing for bankruptcy makes it harder to qualify for refinancing your student loans to either lower the interest rate or lower the monthly payment, it is not necessarily impossible. Some lenders may overlook your bankruptcy if it has been several months to a year after filing, and you have worked to establish good credit after the fact.
For example, College Ave Student Loans may consider a refinance application for borrowers who have recently filed bankruptcy, but these are reviewed on a case-by-case basis. For borrowers who have a proven track record of financial management, Laurel Road student loan refinancing may also be an option even with a bankruptcy on the books. You also need stable employment to qualify, and the lender reviews each application on an individual basis. Information about eligibility can be found on each lender’s FAQs section.
While there are a handful of student loan refinance lenders willing to accept borrowers with bankruptcy, many will not. Neither Earnest Student Loans nor CommonBond offers refinancing options for borrowers who have filed bankruptcy, at least not until the bankruptcy has cleared from their credit report. This, at a minimum, is seven years.
Using a Cosigner to Refinance
It may seem that getting a student loan refinance with a bankruptcy on your credit report is an uphill battle, but there are other strategies for successfully refinancing with some lenders. Several private student loan lenders allow you to add a cosigner to a new loan application which can improve your chances of receiving approval.
A cosigner is typically a family member or friend with a strong credit history, steady income, and few to no black marks, like bankruptcy, on their credit report. Before adding a cosigner to a student loan refinance, however, it is crucial to consider the ramifications should you default on your loan. Failing to repay means the cosigner is on the hook for paying the loan balance, sometimes in a single lump sum.
Be sure to talk through these concerns with your cosigner at length before adding them to your refinanced loan. The good news is that some refinance lenders allow you to request the removal of a cosigner after you make two to four years of on-time payments.
Can You Consolidate Student Loans After Bankruptcy?
One final method for managing your student loan debt after bankruptcy is a federal student loan consolidation. While this strategy does not necessarily lower the total cost of borrowing, it may give you an opportunity to elect an income-based repayment plan that can significantly lower your monthly payments.
Federal student loan consolidation is only available for federal student loans, not private student loans, and it does not require a check of your credit. However, borrowers who are in default on their federal student loans, have a court judgment against them, or have wage garnishment for repayment are not immediately eligible. Federal student loans must be current in order to qualify for consolidation. You can read more about the various income-based repayment options here.