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Private student loans could get easier to discharge in bankruptcy

Historically, discharging student loans in bankruptcy has been a difficult task, albeit not impossible. However, a recent ruling could have positive implications for Washington college graduates carrying enormous amounts of debt. In the future, bankruptcy could be a more viable option than ever for handling student loans.

The ruling came after a law school graduate filed for bankruptcy in Nov. 2014. She accumulated $300,000 in student loans over the course of her education but, upon graduation, was unable to pass the bar exam, which is necessary for practicing law. She later found a job with an annual $50,000 salary, but it was insufficient for meeting all of her needs as well as for making payments on her massive student loan debt.

One of the reasons that student loans are so difficult to discharge is due to wording in the Bankruptcy Code. Scholarships, stipends and other funds considered to be educational benefits cannot be canceled or discharged, but the law student grad went on to argue that a $15,000 loan she received from Citbank was far from an educational benefit. Citibank disputed this claim, stating that the loan was indeed an educational benefit as it was given based on her status as a low student at the time.

Ultimately, the bankruptcy judge overseeing the case agreed with the law school grad. As a private loan, the judge ruled that it could not be considered an educational benefit, as a simple requirement for a loan did not shift the act of taking on a consumer credit into some type of benefit. Since many Washington students take out private loans during their pursuit of an education, this ruling could have positive implications for their future ability to discharge debt when necessary.

Source: ABC News, "Judge's Ruling on Law School Grad's Debt Could Signal 'Seismic' Shift in Loan Practices", Susanna Kim, March 28, 2016

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