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In previous posts on this blog we have written about the rising group facing financial difficulties-individuals who have school loans as a result of pursing a higher education. While many who have accumulated debt from a variety of sources, including via both federal and private student loans, may be interested in pursuing a Chapter 13 or Chapter 7 bankruptcy to address the situation, they may find themselves disappointed. This is because it is currently very difficult to discharge this type of debt as part of a bankruptcy proceeding.

While in some circumstances pursuing bankruptcy may still be worth it, some would find themselves no better off than they were before. This is troubling since loans taken out by students for their higher education now account for the largest form of consumer debt. Each year, throughout the nation, the debt hits $1 trillion.

While it has been over 30 years since federal loans were dischargeable in bankruptcy, the change came fairly recent to loans taken from a private lender. Prior to 2005, it was possible to discharge those as a part of a bankruptcy proceeding.

The distinction between the two types of loans is worth noting. Unlike loans issued by the federal government which can often be fairly flexible in repayment terms and are accompanied by low interest rates, few repayment options are available for private loans. In addition, the interest rates are usually quite high.

Fortunately, legislation was recently introduced that would once again make it possible to discharge private school loans. Whether it will succeed remains to be seen.

Source: The Huffington Post, “Fairness For Struggling Students Act Would Reform Private Student Loan Bankruptcy Rules,” Tyler Kingkade, Jan. 24, 2013