Can Student Loans Usually be Discharged in Bankruptcy?
For many years, the answer to this question was a depressing “usually no.” Now, the answer to this question is an encouraging “it’s complicated.” As his outright student loan forgiveness plan faltered, Joe Biden ordered the Department of Education to release new guidelines regarding bankruptcy and student loans. These discharge guidelines, which are examined below, replace the old Brunner Rule, which all but eliminated student loan forgiveness in bankruptcy.
There’s a catch. The new guidelines also greatly restrict student loan mediation. Frequently, student loan forgiveness in bankruptcy is an all-or-nothing proposition. Partial discharges are now rare. So, unless a Chicago bankruptcy lawyer is a good negotiator and a good litigator, student loan forgiveness in bankruptcy is little more than a crapshoot. Only an effective lawyer maximizes your ability to escape from underneath crushing student loan debt.
Discharge in a Chapter 7
Student loans are unsecured debts. Student loan borrowers simply promise to repay them. Usually, unsecured debts are automatically dischargeable in a Chapter 7, unless the trustee (persona who oversees a bankruptcy for a judge) uncovers clear evidence of fraud or other irregularity.
Student loans, along with past-due income taxes and a few other obligations, are priority unsecured debts. These obligations are only dischargeable if certain factors exist. The aforementioned student loan discharge guidelines include the following economic factors:
- Income: Under the old guidelines, discharge was available if repayment forced the debtor below the poverty line. The new guidelines are a little more flexible. Severe financial pain could justify discharge, even if the debtor is still above the poverty line.
- School Closure: This factor often affects private student loans related to technical schools. If the school closed, the student’s degree might be practically worthless. As a rule of thumb, people shouldn’t have to pay top dollar for worthless items.
- Payment History: Borrowers who have sought other kinds of student loan repayment relief, such as deferment, forbearance, and consolidation, yet still have repayment issues are more likely to get discharges.
Furthermore, the old discharge rules required a permanent disability that prevented repayment. The new rules only require a “chronic” disability that affects repayment ability.
If a Chicago bankruptcy lawyer convinces a judge that these economic and medical factors indicate discharge is appropriate, the judge will enter such an order.
“Discharge” means the judge cancels the legal obligation to repay the debt. Collateral consequences of student debt, such as withholding a transcript, remain. A Chicago bankruptcy lawyer must separately address such issues.
Repayment in a Chapter 13
Some people don’t qualify for student loan forgiveness even under the new guidelines. These borrowers still have legal options, primarily Chapter 13 bankruptcy.
When borrowers fall behind, the Department of Education can garnish wages, file collections actions, declare that the loan is in default, and do many other nasty things. Chapter 13 prohibits such adverse actions.
Additionally, Chapter 13 includes an income-based repayment plan that gets debtors back on track with their payments. This protected repayment plan, during which adverse actions are illegal, lasts up to five years.
Count on a Diligent Cook County Lawyer
No matter what kind of financial problem you are having, there’s usually a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. The sooner you reach out to us, the sooner we start fighting for you.