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Filing for bankruptcy despite possibility of increased loan debt

The number of young Americans struggling to pay their student loan bills, as our readers know, is greater than any other time in history. Unfortunately, as we’ve pointed out before on this blog, bankruptcy provides no relief for struggling graduates. The best hope for those carrying heavy loads of student loan debt is to sign up for alternative payment plans. These plans can be manageable, but they don’t address a major reason those loads are hard to carry in the first place: unemployment or underemployment.

For Americans who find themselves in the unfortunate situation of having to seek relief through Chapter 13 bankruptcy, student loan debt can build up even more. That is because many people who file for Chapter 13 are unable to make full monthly payments on their student loan debt. Over three to five years of time, the back payments continue to accumulate, and lenders add interest, late fees and other penalties on top. 

Current bankruptcy rules do not allow debtors to pay down student loans at the expense of other creditors. Still, some debtors with student loan debt still choose to file for Chapter 13 bankruptcy, knowing full well that their loan balances will increase significantly at the end of the process. This may be offset by the prospect of saving a home from foreclosure and getting rid of other burdensome debt.

Those who are considering bankruptcy, and who have significant student loan debt, do well to work with an experienced attorney. In some cases, debt is best dealt with outside of bankruptcy, and in other cases, bankruptcy is the most sensible option given the circumstances. Whatever the case may be, it can help to work with someone who understands the options for debt relief and the bankruptcy process. 

Source: Wall Street Journal, “How Bankruptcy Can Send Your Student Loans Soaring,” Katy Stech, October 1, 2013. 

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