Chapter 7 Bankruptcy Discharge of Student Loans in the
United States Bankruptcy Court for the Northern District of Illinois

Everyone knows that you cannot discharge student loans in a bankruptcy proceeding, right?

Well, it would seem that this “common knowledge” may be more of a self-perpetuating myth. In fact, a 2012 study examining 207 bankruptcy cases from across the nation concluded that when relief from student loans is sought in a bankruptcy proceeding, nearly 40% of the time some form of relief from the student loan debt is achieved—either by settlement, discharge, or otherwise. See Jason Liliano, An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard, 86 American Bankruptcy L.J. 495 (2012).

It is not a simple process, though. Congress has made it hard for a debtor (the legal term for someone seeking a bankruptcy discharge) to discharge student loan debt. Prior to 1976, student debt was treated the same as any other obligation and could be discharged without any further considerations. In 1976, Congress imposed a limitation upon discharging student debt within five years of the origination of a Federal student loan. This was expanded to seven years in 1990. And in 1998, Congress banned discharge of Federal student debt forever, with certain exceptions. In 2005, the definition of non-dischargeable student debt was expanded to include not just Federal student loans, but certain private loans for educational purposes, as well. The current law regarding bankruptcy discharge and student loans is as follows,

A discharge under section 727 of this title does not discharge an individual debtor from any debt unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual

11 U.S.C. § 523(a)(8). Perfectly clear, right? What the statute is basically saying is that in order to discharge a student loan debt, whether the loan was originated by the federal government, a nonprofit organization, or a private lending institution, a debtor must establish that repaying such debt would constitute an undue hardship on the debtor and the debtor’s dependents. But we’re left with a lingering question—what is an undue hardship?

Since Congress did not define “undue hardship,” the courts have had to interpret the language of the statute to come to a workable standard. The test used in the United States Bankruptcy Court for the Northern District of Illinois for whether an undue hardship exists requires that the debtor establish, “(1) that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for [himself] and [his] dependents if forced to repay the loans; (2) that additional circumstances exist demonstrating that the state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good-faith efforts to repay the loans.” In re Roberson, 999 F.2d 1132, 1135 (7th Cir.1993), citing Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir.1987).

More about Bankruptcy Services (click here)

By: Jeffrey M. Pelton
Associate Attorney
Wator & Zac, LLC

For a free initial consultation  please fill out form or contact us

10711 S. Roberts Road
Palos Hills, Illinois 60465
Phone: (708) 974-0000
Fax: (708) 974-0011

6020 W. Higgins Avenue, Suite B
Chicago, Illinois 60630
Phone: (773) 467-0400
Fax: (773) 467-0407

700 Commerce Drive, Suite 500
Oak Brook, Illinois 60523
Phone: (630) 974-1744
Fax: (630) 869-1744