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New bill proposed to assist students facing financial challenges

Chapter 7 bankruptcy is often referred to as "liquidation" bankruptcy. Unlike Chapter 13 bankruptcy, which requires debtors to reorganize their debt and enter into a repayment plan, Chapter 7 allows a consumer to discharge almost all of their debts immediately and get a fresh financial start. One thing that Chapter 7 bankruptcy cannot discharge, however, is student loan debt. However, there has been a recent initiative to change this and to allow student loan debt to be discharged under Chapter 7.

Tennessee residents may have read that New York Senator Chuck Schumer and colleagues are attempting to amend a 2005 provision that made it virtually impossible for Americans to discharge private student loan debts in bankruptcy. While similar legislation has been discussed in the past, it appears that more financial observers are becoming concerned about the amount of student loan debt that Americans are taking on. The battle, however, has just begun.

While government loans have been exempt from bankruptcy since before 2005, private loans only became non-dischargeable in 2005. Under the 2005 legislation, to discharge private student loans a student must show undue hardship. While there is no specific definition for undue hardship, it is a difficult standard that must be met with a preponderance of the evidence. Furthermore, hardship is not automatically determined; rather the debtor must file a petition, known as an adversary proceeding.

In addition to most student loan debt, there are other debts that are not dischargeable if a Tennessean files for Chapter 7 bankruptcy. These debts include recent taxes, child support and spousal maintenance payments, court fees and government-imposed restitution and fines. While few people qualify for discharging student loan debt under the undue hardship standard, financial challenges from student loan debt can still be eased with help from an experienced bankruptcy attorney. If other debts are discharged, a person can be essentially freed to focus on repaying their student loans and rebuilding their financial future.

Source: New York Post, "Schumer & Gillibrand eyeing student-loan debt solutions," Catherine Curan, March 10, 2013

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