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This article will discuss the standard for discharging student loan debt and the heightened standard that applies to borrowers located within the Seventh Circuit’s jurisdiction.  

Key Takeaways

Student loan debt is at an all-time high—$1.7 trillion as of February 2021. Many graduates face limited job prospects and a significant amount of debt to pay. The average amount (also as of 2/21) is $37,693.00. There have been calls to cancel student debt, as well as legislation proposed that would make it easier to discharge student loan debt in bankruptcy.  

This article will discuss the standard for discharging student loan debt and the heightened standard that applies to borrowers located within the Seventh Circuit’s jurisdiction.  

Student loan debt

How Do I Discharge My Student Loans In Bankruptcy?

It is not impossible to discharge your student loans in bankruptcy. However, it is extremely difficult to do so. The U.S. Bankruptcy Code only allows a debtor to discharge student loan debts if the debtor can demonstrate that repaying the loans creates an undue hardship for the debtor and their dependents. In order to do this, you must file a separate action called an adversary proceeding. An adversary proceeding is basically a case-within-a-case. It is filed inside your bankruptcy case, but is treated as a separate matter.  

What Is An Undue Hardship?

That’s a good question. Congress did not define the term, leaving that work to the courts. As a result, the answer largely depends on where you live. Illinois is one of the states located within the jurisdiction of the U.S. Court of Appeals for the Seventh Circuit. Its rulings guide the local bankruptcy courts.  

There are three elements to the undue hardship test. First, a debtor must demonstrate that they will not be able to afford a minimal standard of living for themselves and their dependents. Second, a debtor must demonstrate that circumstances exist which make repayment a hardship and that those circumstances are unlikely to improve substantially during the repayment period. Finally, a debtor must demonstrate that they made a good faith effort to repay the loans. It is a difficult test to pass.  

Many people can satisfy the first prong of the test. Showing that repaying a student loan is unaffordable is not that difficult. Keep in mind, however, that the standard is a minimal standard of living, not the one that you may desire. Courts will not determine that a hardship exists for someone that is simply living above their means.  

What Is It So Difficult To Prove An Undue Hardship?

All three prongs of the test must be satisfied before a student loan can be discharged. The second and third prongs are much more difficult to meet. In particular, the second prong tends to end the analysis for most debtors. This is because the standard is very strict. In the Seventh Circuit, a debtor must demonstrate that their situation presents a “certainty of hopelessness.” Being unable to find a good job does not establish a certainty of hopelessness. Being unable to find a job in your chosen profession does not establish a certainty of hopelessness—this is particularly bad news for debtors with advanced professional degrees.  

What’s more, just because your current situation is hopeless, it must be certain to remain hopeless. Unlike any other debt, the possibility that you might be able to repay your student loans at some point in the future is a factor that courts will consider. Barring a serious disability or other condition that will prevent a debtor from working ever again, it is difficult to say what situation is sufficiently certainly hopeless. These factors are very fact sensitive. There is no one fact pattern that will always satisfy the test. It will always come down to the individual circumstances.  

The third prong of the test is also poorly defined. It seems clear that never attempting to repay a student loan is not a good faith effort. However, whether a debtor is in default on their student loans may be a factor—the law is still developing on the issue. Since most debtors fail at the second prong of the test, there is not a lot of case law to guide this analysis. Some attempt to repay will be necessary. The extent is unclear.  

Quite simply, the way the law currently stands, it is extremely unlikely that your student loan debt can be discharged in bankruptcy. Barring action by Congress, this will not change any time soon.  

Is Chapter 7 or Chapter 13 Better for Discharging Debt?

Both have the option to discharge once the bankruptcy is complete. The difference is that discharge under Chapter 7 occurs within a few months, and discharge under Chapter 13 occurs after the three- to five-year repayment plan. Chapter 13 is a better option for those that want to keep certain assets, such as a house or car, but still want to explore discharging their student loans

How Do I Begin The Process Of Getting My Loans Discharged?

The first step in getting your loans discharged through bankruptcy is filling out an adversary proceeding. An adversary proceeding is necessary because determining if student loans can be discharged through bankruptcy is not a trivial matter. It requires that you (the plaintiff) explain their reasoning and provide evidence to support your argument. You can think of the adversary proceeding as a “petition for bankruptcy.” You will likely need to retain an experienced that can testify about your ability to be employed in the future or if that employment will continue to yield a low income. 

A legitimate legal defense to you paying your student loan may exist, especially if you attended a for-profit vocational or trade school. In the last few years, specific colleges have come under fire for unfair or deceptive practices resulting in students paying for virtually worthless degrees.

Do I Need An Attorney?

The state doesn’t legally require that you retain an attorney to file for bankruptcy and discharge your student debt. However, if you plan to pursue litigation or seek a defense against paying your student loans, having an attorney will save you a lot of time and potentially increase your chance of success.

What Happens If My Petition To Discharge My Student Loans Is Denied?

If you file for bankruptcy, but the court denies your petition to discharge your loans, you’ll still have to pay them back after the bankruptcy process is complete. Chapter 13 can buy you some time and free up some extra cash to put towards your student loans each month, but you’ll still be on the hook for the remainder of your balance. Ultimately, the decision will come down to the court deciding if you have a hardship situation or other avenues repaying your loans exist. A majority of the time, the court rules against the petitioner, citing that they understood the terms and ramifications by signing the loan contract.

O’Flaherty Law is here to help. If you find yourself faced with filing for bankruptcy, we can get you in touch with one of our skilled bankruptcy attorneys to help you out. Please give us a call at (630)-324-6666 or fill out our confidential info form, and a member of our team will get back to you.

February 1, 2021
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