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The www.FedPrimeRate.com Personal Finance Blog and Magazine

Sunday, October 16, 2005

Starting Tomorrow, Discharging Student Loan Debt By Declaring Bankruptcy Will Be Much Harder To Do, But Not Impossible

If you've been thinking about using bankruptcy to get rid your student loan debt(s), you better be prepared to prove that your financial situation is extremely dire. That's because changes to the nation's bankruptcy laws that will take effect tomorrow will make it far more difficult to discharge student loan debt using either Chapter 7 or Chapter 13 bankruptcy protection.

Some folks in the forums I frequent think that discharging student loan debt will be impossible once the changes take effect tomorrow, but this is not the case. In fact, you will still be able to discharge student loan debts with either Chapter 7 or 13, but you must be really suffering financially, or, as the lawyers like to put it,

"...paying the debt would cause the debtor 'undue hardship.'"
And the burden of proof will be on you. To secure a "hardship discharge", you'll need to prove that you are, e.g. unemployable for some reason, or suitably underprivileged, or that there are really no jobs available for someone with your skills. Certain physical or mental disabilities may also be enough to convince a bankruptcy judge that you are worthy of a discharge.

Of course, as with any legal battle, having a lawyer to represent you in bankruptcy court will drastically increase your chances of success if you decide to opt for bankruptcy protection.

It's really no wonder that these changes have been put into place. Back in the 1970's and 80's, certain unscrupulous college students would take out student loans in order to finance their college educations. They would then declare bankruptcy right after graduating from college and get their student loan debts erased. End result: a free education! So, as is usually the case, we all have to pay for the misdeeds perpetrated by a handful of scammers.

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