You can file bankruptcy to try and get rid of your student loan debt. But getting a discharge isn't automatic. In addition to filing a chapter 7 bankruptcy or chapter 13 bankruptcy, you have to file an adversary proceeding.
The adversary proceeding is a separate lawsuit you file either during your bankruptcy case or after your bankruptcy case ends.
In this post, you'll get an overview of the process for convincing a bankruptcy judge to grant you a bankruptcy discharge for your federal student loans and private student loans.
Can you file bankruptcy on student loans in Illinois?
You can file bankruptcy on student loans in Illinois. But just because you can file, doesn't mean you'll win.
No matter where you live, getting rid of your student loans in bankruptcy is hard to do. It's hard to do because you have to convince a judge that you can't maintain a minimal standard of living for yourself and your dependents while repaying your student loans.
But what exactly is a minimal standard of living?
This is where the judge matters. Each judge brings to the job their own beliefs about the world. One judge may find it totally necessary for you to spend $100 month on a gym membership. Another judge may think spending more than $10 on a membership is ridiculous.
In reading the student loan cases in Illinois, I haven't found that one bankruptcy judge is more likely to discharge student loan debt than another. Instead, I've found that they're pretty consistent across the board.
How filing bankruptcy affects student loans
Whether you file a chapter 7 bankruptcy or chapter 13 bankruptcy, what happens to your student loans after filing is the same.
First, if you have a wage garnishment for student loans, that will stop. It may take a pay period or two after you file for the wage garnishment to stop, but it will stop. The money taken from your paycheck after filing should be returned to you.
Second, your loan servicer will likely place your loans into a deferment or forbearance. Depending on your interest rate and the type of bankruptcy you file (7 or 13), your loan balance may increase substantially when your case ends.
Similarly, if you work in public service and have federal loans you're trying to get forgiven, you may not earn any credit towards the Public Service Loan Forgiveness program during your bankruptcy case.
If you file a chapter 13, your chapter 13 repayment plan may call for payments to be made to your student loans during your case. Most repayment plans, however, don't include monthly payments to student loans (or credit cards, medical bills, and other unsecured debt).
Third, when the case ends, it takes about another month or two for your monthly payments to start back and for your credit report to be updated.
Click here to read the Complete Guide to Student Loan Bankruptcy.
How to discharge student loan debt in bankruptcy
To discharge student loan debt in bankruptcy, you have to file an adversary proceeding.
Your bankruptcy attorney may or may not be willing (or know how to) file these types of cases. As a result, you may need to hire a student loan attorney whose experienced at filing adversaries in bankruptcy.
Finding someone near you with that experience may prove difficult.
Thankfully, you don't necessarily need to hire someone near you in Chicago or Springfield or wherever you live in Illinois. You just need to hire someone with experience trying to prove your student loan debt is causing you an undue hardship.
Click here to learn How to File an Adversary Proceeding to Discharge Student Loan Debt.
The Bankruptcy Code & undue hardship
The Bankruptcy Code says that you can discharge student loans only if you can prove they are causing you and your dependents an undue hardship.
The Code doesn't define undue hardship.
As a result, bankruptcy courts have created different tests to analyze whether a student loan borrower is facing an undue hardship.
Bankruptcy courts in Illinois use the Brunner Test.
The Brunner test looks at three factors (prongs) to determine undue hardship:
- inability to maintain a minimal standard of living, based on your current income, for yourself and your dependents if forced to repay student debt;
- additional circumstances indicating your financial situation is likely to exist for a significant period; and a
- good faith effort to repay your student loan debt (deferment, forbearance, income-based repayment, etc.).
In my experience, it's usually harder to discharge loans owed to the Department of Education than loans owed to a private lender. The federal government offers student loan payments based on your income. It's hard to argue hardship when your payments are near $0 per month.
Click here to read the How to Pass the Brunner Test to Prove Undue Hardship.
Getting rid of your student loan debt in bankruptcy is possible. It's just hard to do.
Give yourself the best shot at discharging your student debt.
Speak with a student loan lawyer that knows bankruptcy law and the process for getting a student loan discharge.