Student Loan Forgiveness Through Bankruptcy

Pressure is mounting on lawmakers to forgive at least some student loan debt. But due to the massive cost involved and powerful bank lobbyists, a comprehensive program might not happen. Fortunately, if you are one of the graduates saddled with tens of thousands of dollars of debt, other options are available, even if you are several months behind on payments.

In most cases, a Chicago bankruptcy lawyer can reduce or eliminate student loan payments. However, there are some procedural and practical hurdles to overcome. So, unless you have a good attorney, a bankruptcy filing might not affect your student loan obligation at all, aside from things like temporary wage garnishment relief.

Discharge in a Chapter 7

Student loans are unsecured debts. These borrowers did not put up any collateral for these loans. They simply promised to repay the money.

Generally, unsecured debts are dischargeable in a Chapter 7. The judge usually forgives things like credit cards and medical bills without holding a hearing. But student loans are priority unsecured debts. So are past-due income taxes and a few other unsecured obligations. As a result, student loans are only dischargeable in certain situations.

In the early 1980s, Congress added an “undue hardship” requirement to student loan discharge. However, lawmakers intentionally left it up to the courts to define this phrase. Bankruptcy debtors in Illinois have an undue hardship if:

• They have made a good-faith effort to pay back the money,
• Repaying the loans would drive them below the poverty line, and
• The repayment inability will continue for most or all the loan term.

Recently, due to the mounting student loan crisis, some Illinois judges have taken a more relaxed view of the undue hardship standard. For example, they are willing to consider the amount of debt and the emotional consequences that large monthly payments have on individuals and families.

Therefore, if a Chicago bankruptcy lawyer files a motion, most debtors at least obtain a partial discharge, even if they do not exactly meet the aforementioned qualifications.

Repayment/Renegotiation in a Chapter 13

Other debtors are able and willing to repay their student loans, especially if the repayment terms are reasonable. On-time payments are an excellent way to raise a credit score. However, they are behind on payments, usually because of a temporary job loss. Most banks refuse to negotiate in these situations. Pay us what you owe us, then we’ll discuss terms.

Chapter 13 gives debtors up to five years to gradually repay student loan delinquency. During this time, the bank cannot garnish your wages or take other adverse action. This extended repayment period is especially good news for borrowers who took advantage of coronavirus payment deferrals and now must bring their loans current.

Furthermore, a Chicago bankruptcy lawyer is often able to obtain a lower interest rate or other favorable terms. When disputes like these arise, most bankruptcy judges refer them to mediation. During mediation, the bank has a duty to negotiate in good faith. In other words, it must be willing to make sacrifices and reach an agreement. 

Connect with Experienced Lawyers

Distressed student loan debtors do not need politicians to do something. Relief is already available. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. After-hours visits are available.

Resource:

studentloanhero.com/student-loan-debt-statistics/