Can Bankruptcy Take Care Of Past-Due Student Loan Payments?

Millions of student loan borrowers took advantage of a long-term coronavirus payment deferral. That forbearance is set to end on September 30, 2021. At that time, borrowers who have grown used to spending their payment money elsewhere must suddenly shift this money back to debt retirement. After such an extended forbearance, most student loan lenders won’t be very patient when it comes to additional missed payments.

There is no clear consensus for student loan forgiveness. So, at this point, such relief appears unlikely. However, this platform is already available. Like college itself, the available relief under the Bankruptcy Code comes at a price. Fortunately, an experienced Chicago bankruptcy lawyer knows how to minimize these costs and maximize your fresh start.

Discharge in a Chapter 7

Financially, student loans are unsecured debts. These borrowers put up no collateral and there is no physical property, like a house or care, involved. Generally, unsecured debts, like medical bills and revolving credit accounts, are dischargeable in bankruptcy.

Legally, student loans are priority unsecured debts. These obligations are only dischargeable in some situations. The Bankruptcy Code requires student loan debtors to prove an undue hardship. According to the Seventh Circuit, which includes Indiana, these borrowers have an undue hardship if:

• They have made a good faith effort to repay their loans,
• Repaying the loan would drag them below the poverty line, and
• The hardship is permanent or expected to last most of the repayment period.

This test, which is known as the Brunner Rule, is very harsh, at least on its face. However, the Seventh Circuit has recently softened its stance on student loan discharge. So, most debtors who petition for relief usually receive at least a partial discharge.

A partial discharge which eliminates the past-due balance is usually a reasonable compromise in these situations. If banks refuse to budge, they must explain their refusal to an unhappy bankruptcy judge.

Incidentally, “discharge” means the judge eliminates the legal obligation to repay a debt. Bankruptcy discharge does not affect the collateral consequences, if any, of unpaid debt.

Repayment in a Chapter 13

To avoid these collateral consequences, repayment might be a better option than discharge. Many banks offer repayment plans. However, they are usually based on the amount of debt. The bank’s “payment plan” might be remitting half now and the other half in thirty or sixty days. That kind of plan offers little assistance.

Chapter 13 is different. The trustee (person who manages the case for the judge) helps the debtor set up an income-based repayment plan. In most cases, this repayment plan lasts up to sixty months. That gives debtors plenty of time to break up even a large arrearage into very small monthly payments.

Bankruptcy’s Automatic Stay usually remains in effect throughout the protected repayment period. Section 362 of the Bankruptcy Code prohibits creditors from filing lawsuits, making calls, garnishing wages, or taking other adverse actions. In some cases, the Automatic Stay also prohibits banks from charging interest and penalties while the debtor makes payments.

Reach Out to Experienced Cook County Lawyers

Distressed student loan borrowers don’t have to wait for Washington politicians to do something. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Resource:

forbes.com/advisor/personal-finance/biden-extends-federal-student-loan-forbearance/