My Child’s Student Loans are in My Name: Will They be Forgiven in Bankruptcy?

Parental Loans for Undergraduate Students (PLUS Loans) are priority unsecured debts in bankruptcy cases. So, these obligations are dischargeable in some situations. According to the Bankruptcy Code, student loans, including PLUS Loans, are dischargeable if the debtor has an undue hardship. Indiana courts use the Brunner Rule, which is outlined below, to determine if the debtor has the requisite hardship.

If high student loan payments are causing financial hardship, a Gary bankruptcy lawyer can offer financial relief. Bankruptcy immediately stops adverse creditor actions, like wage garnishment. So, you can repay these loans on your own terms. Additionally, in many cases, at least part of the debt is dischargeable (forgivable) in bankruptcy. So, there are several ways your family could get a fresh start.

Complete Discharge in Bankruptcy

The Brunner Rule has its roots in the mid 1970s, when Congress revised the Bankruptcy Code. Back then, many decision-makers inside and outside of Congress believed that student radicals took out large student loans in the 1960s and had no intention of repaying them. So, the Brunner Rule is very harsh. Discharge is only available if:

• Debtor has made a good faith effort to repay the loans,
• Repayment would force the debtor below the poverty line, and
• Debtor’s economic hardship is either permanent or will probably last most of the repayment period.

Basically, unless the debtor has a severe disability which became a problem after s/he borrowed the money, full discharge is not likely.

Since the Brunner Rule is so harsh and the student loan issue has reached crisis proportions, federal courts in many other states have redefined the “undue hardship” student loan provision in the Bankruptcy Code. These courts now look at the totality of the circumstances to determine if discharge is appropriate. 

The Seventh Circuit, which includes Indiana, still uses the Brunner Rule. However, Indiana bankruptcy courts often apply a somewhat diluted version of the Brunner Rule. Therefore, more debtors are eligible for complete discharge.

Basically, discharge means the judge eliminates the legal obligation to repay a debt. But the debt itself remains. Many schools take individual adverse action against students who do not repay their loans. The schools may continue to do so, until a Gary bankruptcy lawyer resolves the matter separately.

Payment Relief in Bankruptcy

Even if the debtor does not qualify for complete discharge under the strict rules, partial discharge is usually available. That’s because, in most cases, judges refer discharge disputes, including student loan discharge disputes, to mediation.

Essentially, mediation is a court-supervised negotiation session. During mediation, both sides have a duty to negotiate in good faith. A “too bad you don’t qualify” posture is not a good faith negotiating position. Instead, the student loan lender must earnestly want to settle the dispute in mediation. So, the bank must be willing to make some compromises to get a deal done.

Additionally, as mentioned above, bankruptcy’s Automatic Stay stops wage garnishment and other adverse actions. Section 362 applies to all debts, not just to dischargeable debts. In some cases, the Automatic Stay lasts up to five years. So, if you are behind on PLUS Loan payment and the bank is garnishing your paycheck, you have plenty of time to catch up on payments and eliminate this threat.

Reach Out to a Diligent Attorney

No matter what financial problems you face, bankruptcy could be a way out. For a free consultation with an experienced bankruptcy lawyer in Northwest Indiana, contact Whitten & Whitten. Convenient payment plans are available.