Discharging Student Debt when Filing for Bankruptcy

May 23rd, 2012 at 3:15 pm

Although student debt has surpassed credit card debt as the largest single source of debt carried by Americans well into adulthood, student debt usually cannot be discharged under a traditional Chapter 7 or Chapter 13 bankruptcy. 

This causes hardship and embarrassment for adult jobseekers.  Colleges and universities often take the drastic step of holding a student’s transcript until money owed to the institution is paid. This creates a catch 22; when applying for a job that requires a certified copy of your transcript, the university will not release it to the employer because of the money due, jeopardizing your chance of getting a job and earning money to pay off debt.

In 2005, Congress passed legislation that made private student loan debts unable to be discharged, with very few exceptions. In those few exceptions the court will allow student debt to be discharged only if you can prove that repaying it will cause “undue hardship” to you and your descendents.

To prove “undue hardship,” most courts use what is called the Brunner test under which a person must prove that to repay a student loan 1) the debtor cannot maintain a minimal standard of living when loan payments are combined with other regular expenses for the debtor and his descendents 2) there are additional circumstances that will continue during the repayment period, and 3) the debtor has made a good faith effort to repay the loan in the past.

In Illinois, Attorney General Lisa Madigan has sued for-profit colleges, calling the degrees they offer virtually worthless.  And Senator Dick Durbin is pushing Congress to pass the Fairness for Struggling Students Act, which would allow students who borrowed from private lenders to have those private loans discharged. Under Durbin’s plan, federally funded loans would not be discharged through the process of bankruptcy.

While there are some provisions under which student loans can be discharged, Illinois residents struggling with loan repayment should contact an experienced bankruptcy attorney for guidance specific to their case. Contact the knowledgeable bankruptcy lawyers at Newland and Newland in Arlington Heights, IL if you’re overwhelmed by your student loans.

Written by Staff Writer

May 23rd, 2012 at 3:15 pm