Does Bankruptcy Eliminate Student Loans?

The answer to this question varies in different jurisdictions, since the law in this area is unsettled. However, in Illinois, the answer is a resounding “yes,” at least in most cases. That’s very good news for student loan debtors. Over forty million debtors owe almost $40,000 apiece before they finish walking across the stage. Essentially, they are paying for new, fully-loaded automobiles that they never get to drive. That amount of debt forces them to delay large purchases, so their new families must make do with less.

Because of this legal uncertainty, you need an experienced Chicago bankruptcy lawyer to guide you through the student loan/bankruptcy process. Several options are available, and it’s hard to know which one is right for you and your family. Without legal representation, this process is like feeling your way through a minefield in the dark. Your family deserves better, which is why a bankruptcy attorney is always a very wise investment.

Discharge in a Chapter 7

In the 1970s, Congress changed the Bankruptcy Code’s student loan provisions. Although these obligations are unsecured debts, which are usually dischargeable in bankruptcy, lawmakers added a clause that a judge could only discharge student loans if the debtor had an undue hardship.

In 1987’s Brunner v. New York Higher Education Services Corporation, the Second Circuit Court of Appeals ruled that debtors only had an undue hardship if:

• They had made a good faith effort to repay their loans,
• Repayment would mean the family could not live above the poverty line, and
• The hardship would probably exist for most or all of the repayment term.

All other federal court circuits, including the Seventh Circuit, which includes Illinois and Indiana, quickly adopted the so-called Brunner Rule.

As the student loan crisis escalated in the early 2000s, many courts revisited the Brunner Rule. Some courts have replaced this standard with a totality of the circumstances rule. If, considering all the facts, student loan repayment would be impossible or difficult, discharge in bankruptcy is appropriate.

The Seventh Circuit has not gone that far. But it has relaxed the Brunner Rule and allowed judges to take more facts into account before they decide whether or not a student loan obligation is dischargeable.

Since this change, most Chapter 7 debtors in Illinois who have requested student loan relief have obtained at least a partial discharge. That’s largely because most judges refer student loan disputes, and other bankruptcy disagreements, to mediation. During mediation, the bank has a duty to negotiate in good faith. It must compromise if that’s what it takes to reach an agreement.

Repayment in a Chapter 13

In some cases, debtors are behind on student loan payments, and that arrearage has them in financial trouble. Chapter 13 might be a solution in these situations.

These debtors get up to five years to catch up on past-due student loans and other accounts. During the repayment period, the Automatic Stay prohibits creditors from harassing debtors or pressuring them into repaying the arrearage faster. Instead, they must accept the income-based payments, at least in most cases.

One advantage of Chapter 13 is that everyone qualifies for this form of student loan forgiveness. There’s no need to qualify under the Brunner Rule.

Reach Out to Diligent Cook County Lawyers

Student loan forgiveness is available through bankruptcy. 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:

educationdata.org/student-loan-debt-statistics