Chapter 7 Bankruptcy Discharge of Student Loans

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).

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

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Bankruptcy

Credit card debt piling up? Medical bills unpaid? Collection agents calling non-stop? Losing your home or your car because of unpaid payments? Save what you can!!! Get the relief you need!!! Call us to see how we can help you get a new start and get the relief you need from the weight of all of these bills. Call 773-467-0400 for a free consultation with an attorney in our firm.

Why you may be able to walk away from your second mortgage and owe nothing to the Bank?

In not too distant past, when the economy was booming and real estate values were sky high, a lot of people took out second mortgages as home equity lines of credit on their homes.  Since then, the economy has taken a major beating and most homes lost substantial value, thus placing many homes upside down in terms of what the home is worth vs. what is owed on it.  For many, the value of their home does not exceed the balance on their first mortgage, and the home value does not reach at all to the second mortgage.

Now, there may be a solution to this problem.  Through Chapter 13, people can get rid of their second mortgage at a great discount, often for as little as five or ten cents on the dollar.  So, for example, if you have a second mortgage on which you owe $50,000.00, Chapter 13 may allow you to pay as little as $5,000.00 or even $2,500.00 total, over the course of up to 5 years, and wipe out the rest of your liability on the second mortgage.  This could be a major benefit for homeowners and is worth looking into. For more information contact us at (708) 974-0000 to find out how we can help you reduce your mortgage debt and keep your home. Convenient locations in Chicago (Jefferson Park), Oak Brook and Palos Hills.

Unpaid Tolls and a Suspended License Plate – What Can I Do?

One of the effective methods used by the Tollway Authority here in Illinois to collect unpaid tolls is by suspending the license plates of the vehicle involved. The tolls are not even the worst part of the total amount because more often than not the penalties and interest drastically increase the amount due. Two ways to handle the matter are either a settlement or a payment plan with the the Tollway Authority. If, as often happens, the settlement amount is not feasible or the payment too high, then a Chapter 13 bankruptcy is a quick and efficient manner of releasing the suspension on your license plates. The payment plan to the trustee is much more manageable in most cases and the suspension is released a short time after filing. If you are facing a situation such as this call our offices for a free consultation to see if you qualify.

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Chapter 13 Bankruptcy and Discount Car Payoff

WHY CHAPTER 13 MAY ALLOW YOU TO PAY OFF YOUR CAR AT A SUBSTANTIAL DISCOUNT

It is common knowledge that the value of a new vehicle depreciates by as much as 30% in the first two years.  Yet, the balance on the car loan, coupled with the annual interest rate, typically drops at a much slower pace.  A number of consumers have vehicles that are several years old and the value of the vehicle is much less than what is owed on the car.   With Chapter 13, if you purchased the car at least 910 days ago, you may be able to pay only what the car is worth and wipe out the rest at pennies on the dollar.  Also, if you have a high interest rate on your car, no matter when it was purchased, Chapter 13 may allow you to substantially lower your interest, thus saving you thousands of dollars. For more information contact us at 877-282-6190.

Can you walk away from your second mortgage and owe nothing to the Bank?

In many cases the answer is YES! In the not too distant past, when the economy was booming and real estate values were sky high, a lot of people took out second mortgages as home equity lines of credit on their homes.  Since then, the economy has taken a major beating and most homes lost substantial value, thus placing many homes upside down in terms of what the home is worth vs. what is owed on it.  For many, the value of their home does not exceed the balance on their first mortgage, and the home value does not reach at all to the second mortgage. Using the parlance of today – the home is “underwater.”

Now, there may be a solution to this problem.  Through Chapter 13, people can get rid of their second mortgage at a great discount, often for as little as five or ten cents on the dollar.  So, for example, if you have a second mortgage on which you owe $50,000.00, Chapter 13 may allow you to pay as little as $5,000.00 or even $2,500.00 total, over the course of the bankruptcy payment plan, and wipe out the rest of your liability on the second mortgage. Imagine owning your home and having the luxury of having equity instead of being over your head in mortgage debt?!?! This is a major benefit for homeowners and is worth looking into. For more information contact us at 877-282-6190 to find out how we can help you reduce your mortgage debt and keep your home. Trust our experienced lawyers to help you get your mortgage debt under control and turn a new page in your home ownership.

Eliminating Mortgage Debt

An effective method in today’s real estate environment (with market prices having declined significantly) to reduce a home owner’s mortgage debt is to discharge said debt in a Chapter 13 bankruptcy filing. This applies to second mortgages, often also called equity lines of credit.  In bankruptcy lingo it is called “stripping-off” the mortgage. Essentially, a lawsuit is filed within the context of the bankruptcy filing, whereby the second mortgage is reduced to the status of an unsecured creditor and paid off as such within the bankruptcy payment plan. At the end of the bankruptcy a discharge is issued for that mortgage and a release is issued from the lender whereby the mortgage is removed from the title of the real estate.