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Student loans not discharged in bankruptcy, students trapped

On Behalf of | Aug 20, 2012 | Chapter 7 Bankruptcy, Firm News

When a person takes out a private school loan to attend a Florida university, he or she does so with the expectation that some sort of career or job will follow the attainment of a diploma. What a person is not expecting is a medical illness, or disability due to a car accident or the inability to get a job in a slow economy.

Those with student loans, either private loans of federal loans, may be surprised to discover that student loans are not dischargeable in bankruptcy. A Chapter 7 bankruptcy, also called a personal bankruptcy, has some exclusions when it comes to debt that can be discharged, or forgiven. Among the exclusions are child support debts, alimony, tax debt, criminal fines and student loans.

According to industry sources, the problem for students who cannot pay their school debt is the private lenders. Because the debts cannot be discharged in bankruptcy, the banks seem unwilling to work with the students for a payment plan revision or other revised terms. The federal lending authorities are more likely to work with the borrowers and offer payment plans or other workout options.

The inability to discharge student loan debt stems from the Congressional bankruptcy reforms of 2005. As of 2012, 2.9 million people have accumulated private student loan debt worth about $150 billion. Senator Dick Durbin introduces legislation every year to attempt to get some relief for those with private student loan debt, but apparently the bill doesn’t get out of committee.

It is unknown when additional changes to the bankruptcy law will take place, but until then, students should be cautious when taking out private loans to pay for schooling. Those loans are dischargeable only in rare hardship circumstances.

Source: HuffPost, “Private Student Loan Bankruptcy Rule Traps Graduates With Debt Amid Calls For Reform,” Tyler Kingkade, Aug. 15, 2012

At our law firm we assist individuals who are seeking a fresh start through bankruptcy, and help those with student loan debt find financial solutions that will work for them.

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