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Student Loan Forgiveness: Supreme Court Refuses to Reinstate Biden’s Plan

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In an unsigned August 2024 order, the Justices stated that they would continue to block a student loan cancellation plan while the appeals process plays out in Biden vs. Missouri et al.

The order leaves the injunction from the U.S. Court of Appeals for the 8th Circuit in place for now. The Education Department paused loan payments for borrowers enrolled in the program earlier this month because of the ongoing legal proceedings.

The latest program is an income-driven repayment plan in which monthly payments of a loan are based on the borrower’s income. Rolled out by the Biden administration in July 2023, the SAVE plan lowers monthly undergraduate loan payments to 5 percent of a borrower’s discretionary income, at least in most cases, and provides for shorter repayment periods and earlier loan forgiveness for borrowers with smaller starting balances. A borrower who owed $12,000 or less, for example, would have their outstanding debt wiped away after making 10 years of payments.

In the Missouri dispute, a federal district court found first that Missouri had the legal right to sue. It also determined that the state had a “fair chance” of succeeding on its claim that the secretary of education exceeded his authority by shortening the repayment period for borrowers with original balances of $12,000 or less.

Repayment in a Chapter 13

While lawyers from both sides squabble over the administration’s latest student loan forgiveness plan, a Chicago bankruptcy lawyer obtains similar relief for distressed debtors almost every day, mainly through Chapter 13 bankruptcy. This federal debt relief program assists distressed student loan borrowers in three key ways.

When debtors file their voluntary petitions, the Automatic Stay immediately takes effect, at least in most cases. Section 362 of the Bankruptcy Code protects debtors from common student loan collection tactics, such as:

  • Wage garnishment,
  • Collection lawsuits,
  • Harassing letters, and
  • Bank account levy.

The law is quite clear that the Automatic Stay applies to private creditors, like student loan servicing companies, and public creditors, like the Department of Education.

Actual notice is critical. Often, student loan collection involves several entities. A Chicago bankruptcy lawyer must ensure that all of them receive actual notice, or the Stay may not take proper effect.

Second, Chapter 13’s protected repayment period gives distressed borrowers up to five years to catch up on past-due student loan payments and other allowed claim delinquencies, such as past-due mortgage payments. Once again in most cases, the Automatic Stay remains in full effect for the full protected repayment period.

The Automatic Stay may also prevent creditors from adding penalties and interest to past-due amounts, as long as the debtor is adhering to the repayment plan.

Third, bankruptcy gives a lawyer a chance to renegotiate the interest rate and other essential loan provisions. Legally, bankruptcy cancels all existing financial agreements, and they must be renegotiated from scratch. Ultimately, creditors want money. They don’t want to punish debtors. So, in many cases, they’re willing to reduce the interest rate, so the debtor can make these payments.

Discharge in a Chapter 7

There’s more good news. In December 2022, the Department of Justice, which administers the bankruptcy trustee program, modified the definition of good faith effort to repay student loans.

Instead of using the harsh Brunner Rule, which has been in use for decades, trustees must now use a more balanced approach that considers:

  • Assessment of present circumstances, such as an allowance for reasonable expenses, an allowance for reasonable national standard expenses, and a comparison of actual expenses with the debtor’s gross income,
  • Assessment of future circumstances,
  • Broad consideration of efforts to make payments,
  • Debtor’s assets, and
  • The preference of a partial discharge.

Chapter 7s, unlike Chapter 13s, could end in a matter of months, as opposed to a matter of years. This speed ensures that debtors quickly receive the fresh start the Bankruptcy Code guarantees.

Even if the judge doesn’t issue at least a partial discharge, the aforementioned benefits of bankruptcy, namely the Automatic Stay and renegotiation of debt provisions, apply.

 Count on a Detail-Oriented Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. After-hours visits are available.

Source:

supremecourt.gov/orders/courtorders/082824zr_8mj9.pdf

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