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Proposal would allow bankruptcy discharge of student loans

On Behalf of | Sep 25, 2013 | Bankruptcy Exemptions |

With debt from student loans now towering over $1 trillion nationwide, many college and graduate school students from Garnerville or Rockland, New York are now leaving school with a heavy burden. This impacts tens of millions of families, with approximately 46 percent of all U.S. families owing student loans. Graduates are coming out of college with an average of $26,000 in student loans balances and some owe much more. All too many find repayment difficult or impossible in today’s troubled economy, especially with the high rates of unemployment.

The worst thing is that, for almost all former students, their student loan debt is a nondischargeable debt, which means that they still owe it even if they have to file a personal bankruptcy. As a result, some graduates are moving back in with their parents and putting off such things as buying a house or even a car.

Under the current law, only a tiny handful of ex-students who can prove that payment of the loan would be an undue hardship because of circumstances such as a permanent total disability can discharge a student loan in a Chapter 7 or Chapter 13 bankruptcy. This includes those loans that are a federal loan or ones from a private lender. This was not always the law, and before the 1970’s, student loan debt was treated like any other unsecured debt, such as credit card debt, in bankruptcy proceedings. An ex-student unable to repay the loan because of too much overall debt, an illness or job loss could obtain a fresh start through a bankruptcy filing.

Then Congress changed the law. Gradually, it became more difficult to dismiss student loans during bankruptcy until arriving at today’s situation where it is nearly impossible for the vast majority of students to ever get out from under the burden. A new report by a group called the Center for American Progress calls for a reform of the law that would restore eligibility for discharge in bankruptcy to many student loans.

Under the proposal, loans eligible for such discharge would include those that fail to provide borrowers with reasonable repayment conditions or forbearance in times of difficulty, repayment deferral or repayment options that are income-based.

It further would mandate that loans granted to attend schools that don’t achieve a good track record of success in leading to jobs and careers for graduates or reasonably good salary prospects should be more easily dischargeable. These proposals would provide much needed reform and relief to assist the many college graduates unable to find jobs or who are stuck in low-paying jobs.

Source: The Street, “For All Our Good, Let Student Debtors Go Bankrupt” Laura Kiesel, Sep. 16, 2013

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