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In a rare move, court discharges student debt in bankruptcy

Recent college graduates keenly understand how difficult it can be to deal with student loan debt at a time when the job market in Michigan is still recovering. Yet when individuals fall behind on bills and they decide to file for personal bankruptcy, it's unlikely they will be able to discharge their student loans.

In a recent court decision, however, a woman received approval to have $25,000 worth of student loans discharged. By demonstrating that she was "destitute" and had no means to pay back the student loan debt, the court granted an exception to the typical rule. The woman in this case had paid as much as she possibly could over the course of 11 years and could no longer afford to do so in the future.

If a court allows this kind of debt to be discharged, it's likely that extraordinary circumstances were at play. People facing this kind of financial stress could benefit from consulting with an attorney to explore all available options to find lasting relief.

Knowing that student loan debt won't be discharged in most cases, it's important to understand some of the potential debt relief options available to financially stressed graduates. For those who meet the income requirements, Chapter 13 could be a viable option. Under this type of bankruptcy, some debts are discharged, but the rest are paid off over the course of three to five years.

Although Chapter 13 may not be the best solution for everyone, being allowed to pay back student debt over time can provide enough leverage for individuals to find a clear path to financial independence.

Source: ABA Journal, "7th Circuit OKs $25K student-loan discharge for 'destitute' paralegal," Martha Neil, April 10, 2013

  • To learn more about the topics discussed in this post, please see our firm's Detroit Chapter 13 page.

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