Does Bankruptcy Get Rid of Student Loans?

For the most part, bankruptcy is a debtor-friendly process that eliminates crippling debt and gives your family a fresh financial start. If you file Chapter 7, that fresh start could come in as little as nine months. The bankruptcy process also protects important assets, such as your house and car, while it stops creditor adverse action, like wage garnishment and foreclosure.

But student loans are an exception. In Illinois, Indiana, and a number of other states, debtors must overcome the harsh Brunner rule before they can obtain a hardship discharge. While the task is daunting, it is often successful. Over a third of the student loan debtors who ask for a hardship discharge receive one. Most people simply do not ask, assuming that even a conditional discharge is out of reach.

The secret may be the knowledge and skill of your attorney. A Chicago bankruptcy lawyer must know the rules, and must know how to effectively present a hardship discharge claim.

The Brunner Rule: An Overview

Student loans are unsecured debt. Borrowers do not put up collateral, like a house, to secure these loans. The bank just loans the money. Unsecured debts are normally dischargeable in both a Chapter 7 and a Chapter 13.

However, certain kinds of government unsecured debt, such as back taxes and FSOs (Family Support Obligations like court-ordered child support), have long been in a different category. It is more difficult to discharge priority unsecured debts like these. In the 1970s, Congress expanded this category to include student loans. The Bankruptcy Code states that these obligations are dischargeable if the debtor has an “undue hardship.” Lawmakers intentionally did not define this phrase. Instead, they left it up to the courts.

The Second Circuit Court of Appeals in New York defined this phrase in 1987’s Brunner v. New York State Higher Education Services Corporation. Marie Brunner owed a significant amount of money, but it was not an eye-popping amount. So, the court was clearly miffed that she had made no effort to repay the loan and did not ask for a deferral or any other relief. Instead, she filed bankruptcy almost as soon as the waiting period expired.

The court reacted harshly. It used a three-pronged definition of “undue hardship” which is still valid in Illinois and Indiana today.

• – Inability to Maintain Minimal Standard of Living: To meet this part of the Brunner rule, the debtor’s income must fall below the poverty line if s/he is forced to repay the loans. That’s roughly $25,000 a year for a family of four.
• – Extended Hardship: Unemployment, business downturn, and illnesses are usually temporary hardships. To qualify for discharge, the hardship must last for at least a significant portion of the repayment period, which is usually twenty years.
• – Good Faith Repayment Effort: If loan repayments would drive the family’s income below the poverty line, it’s almost impossible to have a good faith payment history. But that’s what the Brunner rule requires.

In recent years, some other states have abandoned the Brunner rule in favor of a more lenient totality-of-the-circumstances analysis. But Illinois and Indiana have not done so, and the Supreme Court has not weighed in on this issue.

How It Works in Indiana

Generally, to meet the Brunner rule, the debtor must have a physical, emotional, or other disability which makes it impossible to work at a job that pays enough to support loan repayment. Typically, that disability must be something completely involuntary, like a mental illness due to family history or a physically disabling accident.

Typically, these claims settle out of court. The settlement usually takes into account the amount of debt the borrower is able to repay and discharges any debt above that level.

Rely on Dedicated Lawyers

Even under the Brunner rule, student loans are usually at least partially dischargeable. For a free consultation with an experienced Chicago bankruptcy attorney, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Resource:

fas.org/sgp/crs/misc/R45113.pdf

/can-bankruptcy-stop-an-eviction-in-indiana/