In most cases, a college education is a very good financial investment. However, there are always exceptions. Some people in Illinois make serious mistakes and are unable to practice their chosen professions. Other people obtain their degrees but are unable to clear other hurdles, such as a professional competency exam. Still other people are simply unlucky, and their earnings do not match their expectations.
Consumer bankruptcy lets individuals shed unwanted debts like these, so they may obtain a fresh start. However, student loans are only dischargeable in some limited cases.
Background to Student Loan Bankruptcy Discharge
Once upon a midnight dreary, student loans were dischargeable in bankruptcy just like any other unsecured debt. But in the late 1960s, some people felt, rightly or wrongly, that students borrowed their way through college and never intended to repay these loans. As a result, Congress amended the Bankruptcy Code to make such loans dischargeable only if the debtor had an “undue hardship,” but lawmakers did not define this term.
When a student loan case came before the courts, it had all the aspects that those aforementioned people feared. In Brunner v. New York State Higher Education Services Corporation, the debtor declared bankruptcy only a few months after her student loans entered repayment and she had made no effort to pay off the loan or get more time to pay.
The result was very harsh. The Second Circuit Court of Appeals in New York eventually ruled that student loans in Indiana were only dischargeable in bankruptcy if the debtor:
- Had made a good faith effort to repay the loans,
- Has a hardship that is likely to either be permanent or last for the entire period of repayment, and
- Is unable to maintain a minimal standard of living if s/he must repay the loans.
Essentially, only individuals who encounter a physical or other such disability after they graduate and after they have already made payments are eligible for relief under the so-called Brunner rule.
Discharging Student Loans in Illinois
Some courts have reconsidered the Brunner rule in light of the ongoing student loan crisis, but this case is still the law in Illinois and Indiana, thanks to the Seventh Circuit’s decision in Tetzlaff v. Educational Credit Management Corporation. However, all is not lost.
Forty percent of bankruptcy petitioners with student loans get at least a partial discharge, according to one study. To maximize your chances of success, experts suggest that student loan bankruptcy debtors get aggressive lawyers who will fight for them in court instead of just file the required paperwork. A lawyer can also negotiate with the lender. These negotiations often bear fruit, especially since the Department of Education recently relaxed the rules in this area, at least a little bit.
Only a miniscule percentage of bankruptcy debtors with student loans (0.1 percent according to the Yale study) even file adversarial petitions requesting discharge. In other words, 99.9 percent of people don’t even try to discharge their student loans. We do not give up without a fight, and neither should you.
Contact Experienced Attorneys
Despite the Brunner rule, student loans are often dischargeable in bankruptcy. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.