Financial Tips | Money and Kids

Cashspeak! Can Student Loans be Discharged in a Chapter 7 Bankruptcy? - CASHSPEAK
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12/18/07

Can Student Loans be Discharged in a Chapter 7 Bankruptcy?

First of all, what is Chapter 7 bankruptcy? Chapter 7 bankruptcy is also sometimes called “liquidation bankruptcy.” This is the bankruptcy option that cancels your debts. It is available to individuals, but does not cancel every debt that a person has. For example, a home mortgage is not a dischargeable debt. Could you imagine the amount of abuse that would take place if a home mortgage was a dischargeable debt? It is not hard to imagine a person buying something like 10 properties, filing for bankruptcy, having the mortgages discharged, and selling all the property for a large chunk of cash.

As with home mortgages, student loans are not dischargeable in a bankruptcy proceeding. I know the attraction that student loans bring. I have been there and done that. I have borrowed over $100,000 in student loans in pursuit of my Bachelor’s degree and my law degree. Student loans are relatively easy to get, pay quickly, and have a low interest rate. As a result, many students borrow more money than they actually need. This creates a problem when students have to repay the loan upon graduation or at the end of ten years, whichever comes first.

Students are shocked when the repayment period begins. Student loans can add up, and if you do not have the diligence to track your borrowing and cut your costs, you can end up in some serious trouble when the repayment period begins. Consolidating your student loan is a popular option that most students utilize in order to save on interest expenses. Although consolidation will save you money, it is not the “end all” solution to borrowing too much money. The truth is, there is no answer. The only way to solve the problem of borrowing too much money is to prevent it from happening. Remember, bankruptcy will not help you because student loan debt cannot be discharged in this way.

Watch your borrowing and keep track of your expenses. Save money wherever you can and only borrow what you need to live. Borrowing too much will burn you in the long run and will be a difficult obstacle to overcome, especially since many graduates start to accumulate big expenses (such as a home mortgage, a car, marriage ceremony, a new baby, etc.) soon after graduation.


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