New bill urges discharge of private student loan debt

August 27, 2012 11:08 am Published by

Generally, the bankruptcy code outlines which debts can be discharged, however, courts do have some authority in the event of severe hardship. In Chapter 7 and Chapter 13 bankruptcy, most unsecured debts, including credit card and medical debt can be discharged or reorganized, while secured debts, including student loans, taxes, and judgments must be paid in full. A new bill is calling on legislators to pass new regulations that would also allow the discharge of private student loans in bankruptcy.

Many students in New York and nationwide are burdened by high rates of unemployment and a challenging job market as well as extremely high student loan debt with accumulating interest. In the current economy, many young people are indebted to private lenders and unable to recover, even after filing bankruptcy. While many federal loans have fixed interest rates and the ability to defer payments, many students who take on private student loan debt have no relief in the event of hardship.

A recent survey found that many students who took out private loans didn’t know the difference between private and government loan debt. In the proposed new bill, colleges and universities would be required to inform students about federal aid options, including the difference between federal and private debt. More groundbreaking for debtors filing Chapter 7 or Chapter 13, is that the new bill would also authorize the discharge of private student loans.

Under current bankruptcy law, federal and private student loans cannot be discharged at the time of bankruptcy. Proponents of the new bill argue that student loans are the only form of private debt that is non-dischargeable. There is evidence that many students are pushed into private loan debt, even though many of these students will drop out even before earning a degree.

Advocates of the bill argue that without the discharge of private student loans, most of these debtors will never get ahead. The new bill could give many young people who are already overwhelmed by unmanageable debt the ability to get a fresh start through bankruptcy.

Source: WBEZ, “Durbin touts new bills to regulate private student loans,” Quinn Ford, Aug. 20, 2012

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