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School Loans Burden Students With Unmanageable Debt

| Dec 31, 2013 | Bankruptcy

When debt becomes overwhelming, the logical step for many people is to file for bankruptcy to get a handle on debt through reorganization or a fresh start through liquidation. While bankruptcy could be an appropriate option, care should be exercised as there are special rules that apply in bankruptcy to student loans.

Unfortunately for students, high unemployment rates, a stagnant job market and low-paying jobs mean that it is difficult ― if not impossible ― to make payments on their loans. Whether or not bankruptcy is a useful option for students, one must consider that:

  • Student loans are almost never discharged in Chapter 7 bankruptcy.
  • In Chapter 13 bankruptcy, which generally allows consumers to reorganize debts, students may be restricted from making full payments on their loans during the bankruptcy period, which is generally three to five years. This allows lenders to add late fees and penalties to student loan balances in addition to interest, making the student debt even more unmanageable than before bankruptcy.

According to the Wall Street Journal, student loan debt is the second largest source of consumer debt, after mortgages, totaling about $1 trillion and exceeding credit card debt. The bankruptcy laws are simply not equipped to deal with this amount of student debt. Senator Richard Durbin of Illinois has spearheaded student-loan debt-forgiveness legislation to help students avoid insurmountable debt. The senator’s staff is urging the U.S. Trustee program to allow debtors to make full payments on loans during the bankruptcy period. Lawmakers also proposed legislation to discharge private student loans in bankruptcy, a plan that could help but still does not address federal student loans.

When student loans make up the bulk of your debt, it is important to contact a knowledgeable consumer bankruptcy lawyer to help you understand your options, including Chapter 7, Chapter 13 and the possible consequences and benefits of each action before filing for bankruptcy.