Does Bankruptcy Take Care of Student Loans?
As college costs have increased, student loan balances have increased even more. These accounts now total almost $1.5 trillion in the United States. That’s higher than auto loan and credit card balances. Younger people owe most of this money. Since their earning power is lower, these accounts often become delinquent. Even if debtors keep their payments current, the loans sometimes require them to put off marriage, home purchase, and other milestone events.
A Chicago bankruptcy attorney can offer struggling student loan debtors several ways to deal with their debt. All these approaches look better on a credit report than a loan default. And, these solutions help ease the financial burden these people feel, so they can move on with life.
Paying Off Delinquency in a Chapter 13
The Automatic Stay and protected repayment period help all debtors take control of their student loan payments, even if they are seriously delinquent,
Generally, as soon as debtors file their voluntary petitions, Section 362 of the Bankruptcy Code kicks in. This provision immediately stops creditor adverse actions such as student loan wage garnishment. It does not matter if the debt is dischargeable, or even if the debtor wants to discharge the debt. The Automatic Stay applies just the same.
Section 362 also applies to other forms of creditor adverse action. These things include repossession, eviction (in some cases), harassing phone calls at work, and foreclosure.
Once the trustee (person who oversees the bankruptcy for the judge) approves the income-based repayment plan, debtors have up to five years to erase student loan delinquency. Given this time period, even a few extra dollars a month could make a tremendous difference.
Furthermore, an attorney can negotiate with the student loan debtor and perhaps obtain a lower interest rate or a partial loan forgiveness. That’s especially true given the possibility of a discharge, as outlined below. The bank knows that if it does not make a deal, it could wind up with nothing.
Discharging Debt in a Chapter 7
Almost everyone qualifies for Chapter 13, but not everyone qualifies for Chapter 7, and not everyone qualifies for student loan discharge.
Debtors are eligible for Chapter 7 relief if their annual income is below the median for that geographic area. In Indiana as of May 1, 2020, that amount is $88,000 for a family of four. Truthfully, if the debtor’s income is much higher than that, the debtor probably does not need Chapter 7. Alternative relief is probably available.
Next, the student loan must qualify for discharge under the Brunner Rule. This legal doctrine states that a debtor has suffered an “undue hardship,” which is a precursor to bankruptcy student loan discharge, if:
- – The debtor’s inability to pay is either permanent or long-lasting,
- – Student loan repayment would drive the debtor’s income below the poverty line, and
- – The debtor has made a good faith effort to repay the loans.
Despite the apparent harshness of the Brunner Rule, most debtors who request relief obtain at least a partial discharge.
Other dischargeable debts in a Chapter 7 include medical bills, credit cards, payday loans, and other unsecured obligations. Usually, the judge signs a discharge order about six months after filing. So, these debtors quickly get a fresh financial start.
Rely on Experienced Lawyers
Bankruptcy gives distressed student loan debtors several financial options. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters in Illinois and Indiana.
Resource:
nbcnews.com/news/us-news/student-loan-statistics-2019-n997836
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