Americans have accumulated more than $1.48 trillion in student loan debt. According to a report by the Federal Reserve Bank of New York, student loan debt is currently outpacing credit card debt and auto loans. (These five charts show how dire the student loan debt situation has ballooned)
Unlike borrowing money for a house or car, a student loan does not require any collateral. Student loans are considered unsecured debt because there is no guarantee for repayment of that loan. While some unsecured debts can be discharged, student loans are categorized differently and typically are not discharged in bankruptcy cases.
It is possible to discharge student loan debt, BUT you must first prove “undue hardship”, which historically has been very difficult. The courts apply the Brunner Test and examine various factors when determining whether a borrower faces undue hardship and qualifies for debt relief:
Are you facing extended personal burdens (e.g., long-term disability that prevents you from working)?
Does your current income prevent you from maintaining a minimum standard of living?
Have you made every effort to repay your student loans?
In the past, the courts have held meeting “undue hardship” at a very high standard and it has been extremely hard for the average person to meet. This has been especially true in Illinois, where more stringent tests are still being applied (ex: Jeffrey Michael Davis v. Conduent, National Student Loan Program, Conduit, Amer[ican] St[u]d[e]nt Ass[is]t[a]nce, AccessLex Institute d/b/a Access Group[] Inc[.], Dept of
However, recently there has been a trend by courts to relax the standard for undue hardship. For example, in January 2020, a decision was made by a New York Court discharging over $220k in student loans for a debtor with regular employment and no disability. (Kevin Jared Rosenberg v. N.Y. State Higher Education Services Corp., et. al.) The lender has appealed the decision and we will definitely be monitoring the outcome in this case and its impact on national student loan debt.
While a trend is emerging in the courts to make student loans easier to discharge, we have a long way to go in Illinois. If student loans are your main debt burden, it may be worth waiting to file a bankruptcy to see where the law is headed. However, we don’t know how long it will take to change, if it changes at all.
In the meantime, a Chapter 13 bankruptcy can help to relieve student loan payments by forcing the loans into a forbearance for the duration of the bankruptcy (up to 5 years). This means if they are garnishing your wages, taking your tax refund, or pursuing other collection efforts against you, you can stop it by filing for Chapter 13 bankruptcy. You should be aware that your student loans will continue to accrue interest and repayment will be expected following your Chapter 13 bankruptcy.
The bottom line is that it is hard to know what is the best course of action without knowledgeable legal advice. Thurston Law Firm can help you explore your options and determine if bankruptcy is the right choice for you. Contact us today at 312-818-8008 or cthurston@thurstonlawfirm.com.