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Bankruptcy Survey: Student Loan Debt May Create Next Economic Crisis

Last year total outstanding student loan debt incredibly surpassed $1 trillion - and the year before that, student borrowing was greater than $100 billion for the first time ever. This dramatic increase in student loan debt has some worried that we are on the verge of another economic crash on par with the home mortgage crisis, according to a new report and survey by the National Association of Consumer Bankruptcy Attorneys (NACBA) entitled, "Student Loan 'Debt Bomb': America's Next Mortgage-Style Economic Crisis."

Dischargeability of Student Loans in Bankruptcy

Generally student loan debt is not dischargeable in bankruptcy, which means the debtor will still be liable for the debt even after they file for bankruptcy. This rule does have limited exceptions though, such as a showing of undue hardship.

However, the inability to discharge student loan debt hasn't appeared to stop former students from considering bankruptcy. According to the NACBA survey, more than four out of five bankruptcy attorneys report that possible clients with student loan debt have risen "significantly" or "somewhat" in the last three to four years - with almost 50 percent of all attorneys falling into the "significant" category. Moreover, 95 percent of attorneys asked feel only a few students have any chance of discharging student loan debt using the "undue hardship" exception.

According to the survey, 82 percent of bankruptcy attorneys view non-dischargeability of student loans as a "big problem" for debtors attempting to get a fresh start. This has led to calls by some attorneys to reinstate the bankruptcy discharge for student loans and a reasonable statute of limitations when students default on their loans.

Even though a debtor is unlikely to be able discharge student loan debt during bankruptcy, that does not mean bankruptcy cannot help. For example, by filing for bankruptcy a debtor can stop student loan creditors from harassing them for up to five years, which can give the debtor time to get their finances in order. Also, by discharging other debt in bankruptcy, it may free up additional monies to help pay off the student loans.

Source: Forbes, "The Student Loan Crisis Is Crippling America's Families - Is The Economy Next?" 02/07/2012

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