Many different financial experts predict that student loan debt could be the next financial time-bomb facing the U.S.economy (WSJ, MarketWatch, NPR, Forbes). One particular reason for this, is that the Bankruptcy Code provides practically no relief for “student loans.” Traditional, or government-backed student loans, have been nondischargeable through bankruptcy for quite some time. One of the major Molotov cocktails hurled by Congress in The Bankruptcy Abuse and Consumer Protection Act (“BAPCPA“) was the expansion of the student loan exception to discharge for private student loan lenders. In fact, one major misconception for many debtor-clients of mine is that only “student loans” or “loans from the government or banks to finance education” is nondischargeable.
11 U.S.C. 523(8) states:
A discharge under Chapter 7, 11, 12, or 13 does not discharge an individual debtor from any debt:
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
(A)
(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.
This broad statute pretty much encompasses any “loan” or “benefit” received for the benefit of an “educational institution“. If pushed to the extreme, a credit card used to purchase lunch, or beer, for a student could fall under this exception to the bankruptcy discharge.
Education By The Numbers reports that that the supply of college graduates in many fields of study is exceeding the demand for their skills, which aggravates graduate unemployment and underemployment, which in turn increases the rate of student loan defaults.
WSJ reports that in a February 2015 quarterly report, the New York Federal Reserve estimated that student loan debt had climbed to $1.16 trillion in 2014. This is an massive number that translates into approximately $30,000 per student, based on an analysis that estimates 40 million Americans with outstanding student debt.
Adding to this problem, bankruptcy offers no help for these people (like me) – and their parents, who often cosign on student loans along with their college kid (fortunately, my parents didn’t have to co-sign–insert relief emoji here).
So the big question- what to do about it?
As cited above, an individual cannot discharge a student loan debt unless not discharging the debt would be an undue hardship on the individual or his/her dependents. If only the analysis were that simple.
In Utah, or any state under the appellate jurisdiction of the Tenth Circuit Court of Appeals, you must prove the following factors to discharge student loan debt:
1. The Debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself/himself and his dependents if forced to repay the loan
2. That additional circumstances exist indicating that this state of affiars is likely to persist for a significant portion of the repayment period of the student loans; and
3. That the debtor has made good faith efforts to repay the loans.
See Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2nd Cir, 1987), adopted by the Tenth Circuit in Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302 (10th Cir. 2004).
These factors are incredibly difficult to prove. The National Consumer Law Center studied student loan dischargeability actions and found the following:
- A consumer’s prospects of winning a student loan discharge case are slim and worse than in typical civil litigation.
- Student loan holders and their agents, including the Educational Credit Management Company (ECMC), very aggressively fight discharge cases and are far less likely to settle out of court than in typical civil litigation.
- Most consumer debtors need representation by an attorney to bring a hardship discharge adversary proceeding.
- Most consumer debtors, particularly those most in need of a discharge, cannot afford the litigation costs needed to bring a hardship discharge adversary proceeding.
This paper by the NCLC finds that one huge problem is that most consumer debtor’s need legal counsel to help them file their bankruptcy case. Filing for bankruptcy is not like filing your tax returns, it is much more complicated. Most studies show that individuals who file their bankruptcy case without an attorney are much more likely to have their case dismissed. (See The Do-It-Yourself Mirage: Complexity in the Bankruptcy System, in Broke: How Debt Bankrupts the Middle Class at 157 (Katherine Porter, ed., Stanford: Stanford University Press, 2012).
The real answer, as usual, lies with meaningful congressional reform of 11 U.S.C. 523(8). The student loan exception does not need to be eliminated. But, perhaps it should just be a little easier to discharge student loans, or provide a better process to repay, like through Chapter 13.
Two years ago, we successfully prosecuted a student loan dischargeability case and were able to assist one of our elderly clients out of her student loan debt. It is possible, if you fight hard enough. Call today for a free consultation to evaluate your situation for bankruptcy protection.
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