Are Student Loans Being Forgiven in Bankruptcies?
Yes, student loans are being forgiven in bankruptcy. That’s very good news for the forty-two million student loan debtors in America who owe a collective $1.6 trillion. Many of these borrowers weren’t old enough to drink a beer at an off-campus bar. So, they signed contracts they barely understood. Now, they’re saddled with debt that they can barely afford.
For years, politicians have promised relief through student loan forgiveness programs, and haven’t followed through. But such relief is already available, through bankruptcy. Thanks to some recent changes, it’s now easier than ever for a Chicago bankruptcy lawyer to discharge or rework this debt, so it doesn’t weigh debtors down and delay major purchases, starting families, and other beginning-of-adulthood milestones.
Student Loan Forgiveness in a Chapter 7
Most unsecured debts, like credit cards and medical bills, are automatically dischargeable in a Chapter 7 bankruptcy. But student loans are priority unsecured debts (PUDs), like past-due income taxes and a few other obligations. PUDs are only dischargeable in certain situations.
Until recently, student loans were only dischargeable in bankruptcy if the debtor had a long-term disability that made it impossible to repay the loan, and before the onset of disability, the debtor had faithfully made payments. The Biden administration modified this directive and instructed bankruptcy judges to take other factors into account, such as:
- Debtor’s age,
- Amount of debt,
- Debtor’s probable future financial circumstances, and
- Number of dependents the debtor must support.
The totality-of-circumstances analysis allows a Chicago bankruptcy lawyer to obtain student loan discharges in cases that were absolutely hopeless ten years ago.
Furthermore, bankruptcy’s Automatic Stay applies whether or not the loans are dischargeable. Section 362 stops wage garnishment, creditor harassment, and other invasive student loan collection tactics.
There’s more good news. If a Chicago bankruptcy lawyer files a motion to discharge student loan debt, the judge usually refers the matter to mediation. During mediation, the bank has a duty to negotiate in good faith. “Pay what you owe or else” is not a good-faith negotiation position. Therefore, at least a partial discharge is usually available.
Renegotiation and Repayment in a Chapter 13
Not all student loans are dischargeable, or even partially dischargeable, in bankruptcy. These debtors still have options.
Chapter 13 extends the Automatic Stay for up to five years. This extended time gives most debtors plenty of time to catch up on past-due student loan payments. Normally, banks cannot add penalties and interest to the UPB (unpaid principal balance) during the Automatic Stay.
Chapter 13 debtors can add other delinquent obligations, like past-due house or vehicle payments, to the Chapter 13 monthly debt consolidation payment. So, at the end of the five years, they have the fresh start the Bankruptcy Code guarantees.
Additionally, bankruptcy filings wipe out all existing credit agreements. These agreements must be renegotiated in full. These renegotiations give a Chicago bankruptcy lawyer a chance to alter key repayment provisions, such as the interest rate.
Chapter 13 also discharges most other unsecured debts, as mentioned above. Be aware that a discharge removes the legal obligation to repay a debt. But the debt itself remains.
If State U is withholding Mike’s transcript because he’s late on student loan payments, State U may continue withholding his transcript even if a bankruptcy judge discharges the student debt. A Chicago bankruptcy lawyer must address the matter in a separate proceeding.
Connect With a Savvy Cook County Lawyer
No matter what kind of financial problem you are having, there’s a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.
Source:
educationdata.org/student-loan-debt-statistics
