Chicago Bankruptcy Question: How are student loans treated in Chapter 7?

Chicago Bankruptcy Question of the Day:  How are student loans treated in a Chapter 7 bankruptcy?  The short answer to this one, in the eyes of debtors filing for Chapter 7 bankruptcy protection in Chicago, is badly. 

When you file for Chapter 7 bankruptcy protection, you are required to schedule and give notice to all of your creditors, including your student loans.  It does not matter whether or not they are in deferment or if you are current on your payments, they must be scheduled.  Upon fiilng for Chapter 7, the federal bankruptcy court will issue the Automatic Stay of Bankruptcy, which is what protects you and requires all of your creditors to cease any and all collection activity.  This protection does apply to student loan creditors, so while your bankruptcy case is active (usually 4.5 - 5 months in the Chicago area), they are prohibited from trying to collect from you.

This is, however, the extent of the protection that most people get from their student loan creditors when filing for Chapter 7 bankruptcy.  Under section 523(a)(8) of the U.S. Bankruptcy Code, student loans are non-dischargeable debts.  This means that after your bankruptcy is discharged and the majority of your debts are eliminated, the student loans will survive and be able to once again collect from you.  It does not significantly matter whether the student loans are guaranteed by the State of Illinois or the federal government, they are still likely not going to be discharged.

There is an exception to this general rule.  If it can be proven that excepting the student loans from discharge would "impose an undue harship on the debtor and the debtor's dependants", then it is possible to get the student loans discharged.  This is a very high burden to prove.  It is not enough to prove that you cannot afford to make payments on the student loans currently.  You must basically be able to prove that it is not realistic that you will ever be able to make a substantial payment to the student loan creditors.  In order to get the student loans discharged, you must file an adversary proceeding within the bankruptcy case against the student loan creditor(s).  This type of litigation is usually not covered by your standard legal fees and can be quite expensive to prosecute. 

If you have significant student loan debt and have reliable, consistent income, you may be better off filing for Chapter 13 bankruptcy protection.  Chapter 13 puts you on a repayment plan to pay as much of the debt back over a three to five year period, with plan payments based on your budget.  While the student loans will not be discharged at the end of the Chapter 13 either, you would at least be protected from them for a longer period of time and hopefully be in a better position at the end of the Chapter 13 plan to deal with them.

There has been a recent push in Congress, supported by the National Association of Consumer Bankruptcy Attorneys (NACBA), to change the U.S. Bankruptcy Code to allow for more relief from student loans, including possibly having them discharged.  Nobody knows whether Congress will actually act on this, but we can hope.

Having a bankruptcy lawyer who is experienced in dealing with student loans is vital if you are considering filing for bankruptcy in the Chicago area.  You certainly do not want to be ill-advised as to the dischargeability of student loans, nor do you need to enter into costly litigation if there is not a high probability of success.  The bankruptcy attorneys at Ledford & Wu each have years of experience dealing with student loans and are happy to offer you a free consultation to discuss your options.

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