An Undue Hardship Ruling Can Wipe Out Student Debt

We can probably all agree that 2020 in Chicago has been a tough year. If you are overwhelmed with debt but don’t want to file for bankruptcy because it doesn’t help with your student loans, you may want to reconsider. Although Chapter 7 and Chapter 13 don’t automatically discharge student loan debt, it can be wiped out. At Benjamin Brand, LLP, I can help you determine if you qualify for student loan bankruptcy and if it is your best option.

Birth of the Student Loan Bankruptcy Exception

Education loans were treated the same as other unsecured debt, such as credit cards, before 1976, but with the introduction of the U.S. Bankruptcy Code in 1978, things changed. It limited the ability to discharge student loans. Over the last 40 years, a variety of amendments and statutes have tightened requirements for having student loans forgiven in bankruptcy. Legislation includes the Federal Judgeship Act of 1984, The Higher Education Amendments of 1992 and 1998, as well as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Student Loan Default in the 21st Century

Since the 1970s, tuition has surged, and student loan debt has swelled with it. Fast forward to today, and the U.S has more than $1.56 trillion in student loan debt. Many Chicagoland residents from Millennium Park to Woodlawn and beyond the Loop have education debt in the six figures.

To reduce the number of defaulted and discharged student loans, the law allows student loan servicers to garnish wages and take up to 15% of retirement benefits and SSD for education loan repayment. Private loans and federal loans also have different guidelines, which adds to the complexity of the statutes. 

The court is starting to view education loan defaults differently than they did 20 years ago. Student loans add complexity to the bankruptcy process, but they can be discharged successfully if you meet one of these criteria:

  • You are the victim of institutional fraud or identity theft
  • Your school engaged in misconduct
  • Your school closed during the enrollment period
  • You withdrew from school, and it closed within 120 days
  • You have a permanent disability
  • Your repayment would result in undue hardship

To be released from your student loan debt, you must file an action that is separate from the bankruptcy process.

Adversary Proceedings

Even if you meet the criteria for student loan discharge, it is not automatically part of your bankruptcy. You must file an adversary proceeding, during which the court looks at your unique situation. It looks at whether repaying your loans would cause you and your family undue hardship. You should prepare yourself, the requirements can be harsh. Less than half of those who file have their education debt discharged.

If you file Chapter 13 and student loan debt remains at the end of the payment plan, you can file an adversary proceeding. If you have huge medical debt, are unemployed or have been underemployed for a significant time, you may win a hardship discharge. If you file for Chapter 7, the court looks at the value of your assets when determining whether you qualify for a discharge.

Student loan debt in Chicago and throughout the U.S. is soaring. The laws regarding bankruptcy and education debt change frequently, making it a challenge to keep up with the latest facts and requirements. Filing bankruptcy is complex and takes a toll on you emotionally as well as financially. Don’t try to wade through the proceedings alone. You deserve to have an experienced attorney fighting for you.

Contact Me Today

Contact me to schedule your free consultation in person, on the phone or via video conference. We can discuss whether bankruptcy is right for you or if other options may fit your needs better. I can help you understand the process and ensure it is done correctly so that you can attain debt relief and move forward with the rest of your life.

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