Can Bankruptcy Erase My Student Loans?
One of my law school professors told us that “You never get anything unless you ask.” That seems like a fairly straightforward proposition. But if the student loan discharge statistics are any indication, most Chapter 7 attorneys have not learned this lesson.
In places like Illinois, where the Brunner Rule is still in effect, only about 2 percent of debtors with student loan obligations request a special discharge. That’s an amazingly low number, because almost 50 percent of debtors who make this request receive at least a partial discharge.
The Brunner Rule
Prior to 1976, student loans were dischargeable in bankruptcy just like Small Business Administration loans and most other types of unsecured debt. Then Congress added a provision allowing discharge only if the debtor showed an “undue hardship.” Lawmakers intentionally did not define this phrase. Instead, they left it up to the courts.
In 1987, the influential Second Circuit, which covers New York, handed down Brunner v. New York State Higher Education Services Corp. Marie Brunner accumulated significant student debt earning her master’s in social work. Despite being employed, she made no effort to pay off her loans. An obviously irate panel responded with the Brunner Rule. This doctrine defined an “undue hardship” as:
- – A long-term condition which
- – Makes it impossible to repay the loan and live above the poverty line, and
- – A good-faith payment history.
Since around 2000, many circuits have either whittled away at the Brunner Rule or done away with it altogether. But as mentioned, the Seventh Circuit, which covers Indiana and Illinois, has stuck with Brunner.
In plain English, the Brunner rule basically means that the debtor must have a disability that is not self-inflicted, like alcohol dependency. And, this disability must be so severe that the debtor is unable to hold down a job that pays enough to take care of the loan and live above the poverty line.
Discharge Procedure in Illinois
The Brunner Rule intimidates many debtors, as well as many bankruptcy attorneys. But these fears are largely unfounded. Legally, “disability” is a very broad term. The debtor may be able to work, but not be able to earn enough to pay on the loan. For example, a person who has epilepsy may not be able to drive. Or, a person who graduated from a lower-tier law school may be unable to pass the bar exam.
Sometimes, the evidence is clear enough that a bankruptcy judge will grant a discharge outright. But more than likely, the matter will go to mediation.
During bankruptcy mediation, the education debt lender has a duty to negotiate in good faith. In other words, the moneylender must be willing to make concessions to resolve the dispute. Usually, these concessions involve a partial discharge. For example, the parties could use the debtor’s income and expense declarations in Schedules I and J to determine the amount that the debtor can pay on the loans.
As a final note, the Automatic Stay always applies in student loan cases. Even if the judge does not grant a discharge, the lender is generally unable to garnish wages, sue the debtor, or take any other adverse action while the bankruptcy is pending.
Contact Diligent Lawyers
Many student loan debtors do not receive a discharge simply because they do not ask for one. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. After-hours visits are available.