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Using Chapter 13 for student loan debt relief: a temporary, but viable solution

While more Americans than ever are able to pursue higher education nowadays, the costs of education continue to rise and the availability of high paying jobs has not kept up with the demand. Because of this, student loan debt is a major problem for many Americans.

According to the Consumer Financial Protection Bureau, the total amount of student loan debt has significantly outstripped total credit card debt, with a recent estimate coming in at $1.2 trillion. As has been pointed out by commentators, high student loan debt has a negative impact on the economy since graduates are unable to make the purchases and investments they would ordinarily be able to make. 

The problem has forced some borrowers to file for bankruptcy relief. While student loan debt generally cannot be discharged in bankruptcy, it can be reorganized under a Chapter 13 plan. This typically results in a substantially reduced payment under a three to five year repayment plan, which can provide major relief to a borrower and buy time before ordinary payments resume. Unfortunately, the relief is temporary.

Debtors who choose to use Chapter 13 bankruptcy as a means of relief from student loan debt are primarily those with loans from private lenders who don't offer income-based repayment plans. Such lenders are typically more aggressive in going after borrowers for unpaid student loan debt.

In our next post, we'll look a bit more at the law surrounding the discharge of student loan debts. Specifically, we'll look at the undue hardship requirement and what it takes to qualify for discharge.

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