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Could declaring bankruptcy invigorate the economy?

Many people consider putting off declaring bankruptcy because they are unsure which of their assets they will be able to keep. However, they may not be aware that Arizona offers a very comprehensive list of bankruptcy exemptions which allow filers to protect personal property against creditors' claims. Although those in debt are given a break with respect to some debts, Arizona residents declaring bankruptcy will retain possession of student loans, whether declaring bankruptcy or not.

Student loans are not discharged in bankruptcy proceedings. However, this wasn't always the case -- through the 1970s, it was possible to discharge student loans, but over time laws evolved to the point that federal student loans were exempted from bankruptcy and this exemption was then extended to include private loans as well.

With the rising cost of college and the continuance of economic difficulties plaguing fresh graduates, there has been a move to reform the current law and allow debtors to discharge their student debt. According to some experts, today's bankruptcy laws should reflect the unprecedented levels of student loan debt. In fact, a bill to discharge private loans similar to the way private debt is discharged raised awareness about the issue even though it floundered in the Senate.

Experts point out that students with debt may in fact be affecting the economic recovery, as students try to cut expenses by delaying buying houses, starting families or even buying cars. In addition to this, when the pressure of repaying loans looms over former students, they steer away from low paying jobs in the social sector or non-profit sector in order to maximize their income. Some experts go as far as to say that students should be allowed to go bankrupt in a move to invigorate the economy.

In addition to possibly benefiting the economy, declaring bankruptcy offers personal advantages to the filer in the form of discharging most of their debt while putting an end to wage garnishment and creditor harassment. Though it doesn't discharge student debt, filing for bankruptcy allows the filer to restart their financial life with most of their debt behind them.

Source: The Street, "For all our good, let student debtors go bankrupt," Laura Kiesel, Sept. 16, 2013