Bankruptcy And Student Loan Forgiveness
Over forty million college graduates owe over $1.5 trillion in federal student loan debt. This debt load is often overwhelming for young people who are just starting their careers and have limited earning power. Over the past several years, many politicians have made vague promises about student loan forgiveness. A few borrowers have even benefited from these promises. But for the most part, as is often the case in politics, it’s just been a lot of talk.
One reason for this inaction may be that student loan forgiveness is already available. A Chicago bankruptcy lawyer can use this federal debt relief program to eliminate some or all of your student debt. Alternatively, bankruptcy can extend the repayment schedule, so borrowers can make income-based payments instead of accepting the “payment plan” a faceless loan servicing company offers. Either way, student loan forgiveness through bankruptcy helps distressed debtors get a fresh financial start.
The government is very aggressive when it comes to collecting delinquent student loans. Common tactics include:
- Collection notices,
- Lien placement,
- Wage garnishment,
- Collection lawsuits, and
- Bank account levy.
Bankruptcy’s Automatic Stay instantly stops these and other creditor adverse actions. In fact, Section 362 of the Bankruptcy Code technically prohibits creditors from communicating with debtors. Courts are quite clear that this prohibition includes both private banks and the state or federal government.
Usually, the Automatic Stay remains in place until the judge closes the bankruptcy. That could be up to five years. Creditors, even the federal government, can only bypass the Stay in very limited situations. These situations usually don’t apply to unsecured debts, like student loans and credit cards, no matter how much the debtor owes.
Additionally, if the Department of Education, or any other creditor, tried to bypass the stay, a Chicago bankruptcy lawyer can block those efforts in court.
Student Loan Forgiveness
Legally, student loans are priority unsecured debts. Therefore, unlike credit cards, SBA loans, and other unsecured debts, they are only dischargeable in some situations. Currently, the Bankruptcy Code permits student loan discharge if the debtor has an undue hardship. Illinois bankruptcy courts have three requirements in this area:
- Prior good faith effort to repay the loans,
- Repayment would drive the debtor below the poverty line, and
- Financial hardship expected to last for most of the loan period.
Admittedly, these elements are hard to prove. Sadly, therefore, many bankruptcy debtors don’t even ask for student loan forgiveness.
Judges usually refer discharge disputes to mediation. A third-party mediator, who is usually an unaffiliated Chicago bankruptcy lawyer, meets with both sides and ensures that they negotiate in good faith. “You don’t qualify, so sorry, Charlie” is not a good faith negotiating position. Instead, the Department of Education or other creditor must be willing to make some sacrifices in order to reach an agreement. Thus, most bankruptcy debtors who apply for relief at least receive a partial discharge.
As mentioned, extended repayment options are available as well. If the borrower is behind, the trustee (person who oversees the bankruptcy for the judge) sets up the borrower on an income-based repayment plan. As long as the repayment plan meets minimum legal qualifications, creditors must accept it.
Reach Out to a Compassionate Cook County Lawyer
No matter what kind of financial problem you are having, bankruptcy could be a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Virtual, home, and after-hours visits are available.