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Uncertainty arises over proposed legislation to discharge loan debt

Most people won’t deny the current economy is a rough one for recent college graduates. To add to their problems, they are also graduating with a record amount of debt in the form of private and federal student loans.

Some students with large amounts of debt and no employment are shocked to discover that the bankruptcy options for their student loans are limited to strict hardship claims, which are only granted in very limited circumstances. There is legislation being proposed in Congress, however, that would allow private student loans to be discharged in the same manner as other unsecured debt in a bankruptcy proceeding. However, private loans only account for about 7 percent of the student loan pool; the rest are guaranteed by the federal government and would remain a non-dischargeable debt. It is theorized that since federal loans are given without regard to creditworthiness, only including private loans in bankruptcy would leave out the largest group of students in need of relief.

Many associated with the banking industry feel that if the current law changes, it will create confusion for borrowers regarding which types of loan are dischargeable. It is also feared the interest rate on private loans will increase because banks will be forced to create reserves to offset potential losses.

It’s difficult to be a young adult with a large amount of debt. If the major portion of the debt happens to be made up of student loans, it’s unpleasant to discover that there are few options for reducing or eliminating it. An attorney with experience in bankruptcy may be able to help determine whether an individual qualifies for a hardship discharge or if it is possible to negotiate with the lender for better terms.

Source: U.S. News, “Discharging Private Student Loans Is Counterproductive,” John Hupalo, Dec. 26, 2012

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