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Bankruptcy exemption for student loans is not without exceptions

Tennessee families are all too familiar with the difficulty young people face after graduation. According to the Department of Education more than 3.6 million students entered into the repayment period on their loans between Oct 2008 to Sept 2009, and more than 320,000 fell behind in repayment of those loans by one year or more by the end of September 2010.

In 2012 student loan debt nationally topped $1 trillion. Student loans now account for more consumer debt than credit cards or car loans, and because of this there has been a lot of talk about the bankruptcy exemption for private student loans. The exemption is fairly new. It was introduced in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

While the student loan bankruptcy exemption is generally considered absolute, the truth is much more varied. In fact, it is possible to erase student debt through bankruptcy it is just not easy. Under federal bankruptcy laws, students that wish to extinguish student loan debt by filing for bankruptcy must show that repaying the debt will cause an "undue hardship."

One element of the undue hardship test is convincing the judge that there is a certainty of hopelessness to the financial lives of the individual filing. In one recent case, a 31-year-old student was able to meet that standard. The former student was diagnosed with diabetes that ultimately left him legally blind and unemployed shortly after graduating from college.

For many filing for bankruptcy, the burden of eliminating student debt is simply too great. In the case of the young man mentioned above, his bankruptcy was filed six years ago and he is only now reaching the end of his journey. While the probability of eliminating student debt through bankruptcy may be difficult, for the persistent few it might just be possible.

For those who cannot meet the undue hardship standard, bankruptcy may still be a viable solution. Often times filing for bankruptcy is a way to free additional cash to pay those bills that are ultimately unavoidable. Sometimes a little bit of help goes a very long way.

Source: The Bend Bulletin, "Price of student loan cancellation: hopelessness," Ron Lieber, Sept. 1, 2012

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Mark T. Young & Associates
2895 Northpoint Blvd.
Hixson, TN 37343

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