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Will student loans become eligible for bankruptcy soon?

Tennessee residents may be aware how many young American college graduates are struggling financially, just as they are trying to begin a career. According to recent reports, college debt is now passing the $1 trillion dollar mark, and it is only expected to grow. While college loan debt is within a category of bankruptcy exemptions that cannot be discharged through bankruptcy, the new federal Consumer Financial Protection Bureau is trying to change that particular rule.

The Consumer Financial Protection Bureau recently nudged Congress, suggesting that the institution considers allowing the most burdened of borrowers to discharge their student loans through bankruptcy. According to the bureau's proposal, the change would allow individuals who are unable to manage payments over a four or five year period to discharge their debt through bankruptcy. The change would apply only to private student loans.

The bureau's suggestion, however, was not met with immediate support. Many in the banking industry and certain ranking members on the Senate Banking subcommittee have opposed any such change to the rules. Opponents of this change assert that allowing private student loans to be dischargeable through bankruptcy would create hardship for the private lenders. Supporters of the reform think it was a mistake to treat student loans differently in bankruptcy law in the first place.

The current system began in 1977 when Congress acted to protect lenders by limiting the ability of borrowers with government loans to file for bankruptcy. At first the law only applied to government student loans, but was later expanded to all student loans. The current proposal is intended to affect only private loans, leaving government loans exempt from bankruptcy for the foreseeable future.

Regardless of what happens with this legislative proposal, young Tennessee residents who are financially strapped can find other ways to shed some of their debt. Though student loans may account for a large portion of young people's debt, there are still ways financial liabilities debts can be handled and effectively reduced.

Source: The Fiscal Times, "CFPB Pushes Bankruptcy Protection for Student Loans," Eric Pianin, July 25, 2012

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

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