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Could bankruptcy help those struggling with student debt?

Although bankruptcy does not currently include the discharge of student loans, some are wondering if law changes could help those struggling with debt after college. For many residents in Florida and across the United States, debt comes from a variety of sources, such as credit cards, loans and house payments. Although bankruptcy can help with most of these debts, due to a 2005 law, student loans are excluded from bankruptcy. A recent report out by the Consumer Protection Bureau and the U.S. Department of Education suggests that Congress should reconsider the law as more and more people struggle to overcome student debt. But some wonder -- would it actually make a big difference?

A recent news article suggests that a change in the law may not impact a lot of people. Bankruptcy would only be extended to private student loans and considering that 85 percent of all student debt consists of government loans, that doesn't leave a lot of debt to be considered for bankruptcy. On top of that, many loans are co-signed by other individuals, such as parents. These co-signers are not always willing to take the hit of bankruptcy on their credit score, making the potential bankruptcy filing pool even smaller.

Of course, if the government, which carries a load of $848 billion in outstanding student loans, decides to allow its loans to be discharged in bankruptcy, the situation could be quite different. But considering that proposed laws to discharge private loans have gone nowhere, the likeliness that a law supporting discharge of government loans would pass is not likely.

Many people go to college with a dream of obtaining a degree that will help them be financially well off. Unfortunately that dream is often shadowed by loans that linger for years after graduation. Although bankruptcy doesn't include student loans, it can still help those struggling with debt reach a stronger financial future.

Source: Business Week, "Bankruptcy shift wouldn't ease much student debt," Karen Weise, July 27, 2012

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