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Bankruptcy discharge pushed for school debt

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Statutes of limitations exist for nearly all federal criminal actions - except for espionage, treason, and since 1991, student loan default.

Delinquent borrowers may be relieved to learn that student loan default – unlike espionage and treason – is not punishable by death. But defaulting on a student loan can have disastrous effects on a borrower’s personal credit and lead to a lifetime of financial difficulties.

In February, the National Association of Consumer Bankruptcy Attorneys called on Congress to restore bankruptcy discharge for student loans in its report, “The Student Loan ‘Debt Bomb’: America’s Next Mortgage-Style Economic Crisis?” In the meantime, colleges, federal assistance programs and state governments are taking steps toward reducing loan debt before it becomes unmanageable.

Gradual changes in bankruptcy law put the squeeze on borrowers

In 2010, student borrowing for higher education surpassed $100 billion and total outstanding student loans exceeded $1 trillion for the first time in 2011.

Before 1976, federal student loans could be discharged in bankruptcy. But that year, Congress created an exception to United States Bankruptcy Code to exclude federal student loans from discharge unless they had been in repayment for five years. That exception was included in the 1978 Bankruptcy Act; then in 1990, the five-year repayment provision was changed to seven years. In 2005, Congress eliminated altogether the ability to discharge all federal and most private student loans – with one exception.

Borrowers may – in rare instances – be able to discharge student loan debt if they can prove in court evidence of undue hardship.

“Impossible – I’ve never seen it done,” said Jeff Hester, chair of the Commercial & Bankruptcy Law section of the Indiana-polis Bar Association. “I stopped reading the cases.”

David Ollis, chief counsel for the Chapter 13 trustee in Seymour, said most lawyers don’t even mention that slim chance of proving undue hardship.

“It’s such an uphill battle that most attorneys are putting in their plans: ‘The undersigned debtor will not discharge student loan obligations,’” Ollis said.

The NACBA mentions in its report the challenges in proving undue hardship.

In the case of Marie Brunner v. New York State Higher Education Services Corp., 831 F.2d 935 (2d. Cir. 1987), the 2nd Circuit Court of Appeals affirmed the finding that Marie Brunner failed to meet a three-pronged test of undue hardship: (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs 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.

In some cases – such as Denise Megan Bronsdon v. Educational Credit Management Corp., 435 B.R. 791 (BAP 1st 2010) – where borrowers attended college later in life, with no evidence to suggest that their job prospects would improve, courts have granted undue hardship. But in order to prove undue hardship discharge, borrowers would need to hire an attorney to sue their lender – an expense that struggling graduates generally cannot afford.

Dangers of default

Last September, the U.S. Department of Education released 2009 cohort default rates, which had increased across all sectors from the prior year.

The rates only consist of borrowers whose first loan repayments came due between Oct. 1, 2008, and Sept. 30, 2009, and who defaulted before Sept. 30, 2010. Among that group, public institution defaults increased from 6 to 7.2 percent, private institution defaults increased from 4 to 4.6 percent and for-profit default rates jumped from 11.6 to 15 percent.

Ollis said that once student loans enter default, people who enter bankruptcy and make good-faith efforts to repay their debt find their problems are compounded by some sections of the U.S. Bankruptcy Code. Ollis helped litigate such a case several years ago.

In Joseph M. Black, Jr., Trustee, Plaintiff-Appellant, v. Educational Credit Management Corp., and Margaret Spellings, Secretary of Education, Defendants-Appellees, 459 F.3d 796 (7th Cir. 2006), Ollis was part of the plaintiff’s counsel in a dispute about collection fees on two defaulted loans.

In that case, David Barnes received Federal Family Education Loan Program loans for $2,000 and $2,625 to attend truck driving school. He defaulted in 1989. Barnes and his wife filed for Chapter 13 bankruptcy protection in 1999, and in 2000, Educational Credit Management Corp. filed an unsecured proof of claim in the Barneses’ bankruptcy proceeding for $9,108.01, which represented $7,714.88 in principal and interest on the two defaulted student loans and $1,393.13 in collection costs. The collection costs were 18.06 percent of the $7,714.88 total of the principal and interest Barnes owed by then. ECMC arrived at this figure by using the methodology prescribed in 34 C.F.R. Section 682.410(b)(2), which allows the use of a flat “make whole” rate, in lieu of actual collection costs in the particular case.

Ollis argued that the law unfairly penalizes people who are attempting to make good on their defaulted loans. The Higher Education Act makes defaulters liable for “reasonable” collection costs, which the FFELP calculates based on the loan guarantor’s entire portfolio. That means a borrower who defaults but is trying to repay that debt is paying a pro rata share of collection costs for all other defaulted loans, regardless of whether those other borrowers in default are attempting to repay their debts.

People who enter Chapter 13 with defaulted student loans pay down their other debts so that they may be able to repay their loan debt after emerging from bankruptcy three to five years later. But during that time, their loan debts continue to grow.

“The thing that separates a credit card from a student loan debt is, they’re both unsecured debt, but in a student loan, the interest continues to accrue during bankruptcy,” he said.

Read a related story on how higher education is looking at address the student-loan economic crisis.

The call for reform

Hester said that most clients under age 40 or 45 who file for bankruptcy have student loan debt.

“What I’ve never understood is, why are they non-dischargeable? What is so special about this debt?” Hester asked. He also said that a simple fix – and one not available to student loan borrowers – would be the ability to refinance existing student loans at the prime interest rate.

Alan White, professor of law at Valparaiso University Law School and visiting professor of law at City University of New York, has written extensively about mortgage foreclosure, fair lending and other consumer law issues. He does see some parallels between what’s happening with student loan debt and the housing bubble – particularly because borrowers’ loan debt is growing faster than their ability to pay.

“It’s really the non-dischargeability of the student loan that’s the problem,” he said. “We like to think that bankruptcy is a screening device – there are rules in bankruptcy that keep people who can afford their debts from turning their backs on them.”

Among NACBA’s many recommendations for reform is that Congress re-impose a reasonable statute of limitations on student loan collections. The Higher Education Act Amendments of 1991 removed those limitations. Since then, the government has had the power to pursue for a lifetime people who have defaulted on federal student loans.

Over the years, Ollis has seen a shift in the people filing for bankruptcy.

“We’re seeing more and more student loan debt in these Chapter 13s, and the interesting thing about Chapter 13 is it has moved from people who were formerly working in factories and things like that,” he said. “It’s kind of gone middle class, so to speak.”•

Survey data from the National Association of Consumer Bankruptcy Attorneys.

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  • incroyable
    First off why should the taxpayers be subsidizing the fat salaries of academia who in many cases have been aggressively tearing away at the social fabric of the West for the past 50 years? (Deconstructionism, Marxism, you name it) Is that supposed to be a benefit to the nation? Only if the loans were for engineers and scientists and physicians. taxpayers subsidizing student loans for the erstwhile "humanities" is like the subject of a euthanasia having to pay for the poison in advance.

    Moreover, the debt ought to be nondischargeable like all others. Students are getting tricked into debt slavery and for what? A worthless diploma in many cases and a lifetime of interest-bearing debt they can never escape.

    I would like to see all the class-conflict Marxist professors who have benefitted from the postwar combine of the GI Bill and subsidized student loans to get together and out of solidarity contribute to a lobbying effort to modify student loans and make them dischargeable in bankruptcy. that is the least they can do to help the proletarian student graduates of today as they retire with their pensions and wonderful university ehalth care plans. And let the falsely named "nonprofit" universities soak up the losses. They dont pay enough in taxes to start with, anyhow. most universities could cut their managerial paper pushers by half and still do just as well.

    I compliment this newspaper on this excellent article on a timely issue of signficant public interest. I am sure that the paper will not share the sentiments of the first paragraph of my comment but nonetheless, well done.

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  1. Am I the only one who sees that the City is essentially giving away the MSA site AND giving millions to build new buildings on the site when this site would be the perfect place for the Justice Complex? Across from City-County, check; keeping it centrally located, check, etc. It's my understanding that the GM site must be purchased by the City from Motors Liquidation Company. STOP WASTING WHAT WE ALREADY HAVE AND OUR TAX DOLLARS! The Ballard Administration has not been known for it's common sense...never voted for him and never will!

  2. This guy sounds like the classic molester/manipulator.

  3. Louis D. Brandeis was born in 1856. At 9 years of age it would have been 1865. The Brandeis family did not own slaves. My source Louis D. Brandeis: A Life, by Melvin L. Urofsky.

  4. My name is Matthew Lucas Major, I recently went through a jury trial in Bloomington , In. It was the week of Feb 19-21. Although I have been incarcerated since August 5, 2014. The reason I 'am writing to you sir is on the 21 of February the jury came in with a very excessive and wrongful verdict of guilty on 6 child molesting charges against my daughter who was 9 at the time I was accused. I also had 2 other Felonies one of Intimidation and 1 of Sexual Vicarious Gratification. Judge Marc Kellam on the second day of trial gave me a not guilty on those 2 felonies. The jury was sent out during that time and when brought back Judge Kellam told them to not concern themselves with the 2 Felonies that he ruled on them. They were told to not let evidence they had already heard influence there verdicts. I never in my life touched any child sexually and definitely not with my own daughter. When I was arrested Detective Shawn Karr told me I would be convicted guilty just on my daughters word even without evidence. That's just what happened. my public defender did me so wrong he never once proved to the court and jury all the lies the child told, and Jeremy Noel my public defender could of proven the lies easily. The stories in Serenity's depositions and Forensic interview changed and were not consistent as Prosecutor Darcie Fawcett claimed they were. Yet my attorney never mentioned that. The facts that the child accused me of full penetration in her vagina and rectum was proven lies. Doctor Roberta Hibbard of Riley hospital in Indianapolis confirmed Serenity's hymen intact, no scars, no tearing, no signs of rape to her. Yet my attorney didn't use that knowledge . the DNA was all in my favor. I tell you I will spend my entire life in prison going through rape and beatings etc. even Judge Kellam abused his authority by telling the jurors to listen and believe what the prosecutors side in evidence like my daughters testimony. In one interview with the detectives my daughter got flustered with her mom and said on camera " I'm saying what you told me to mom"!! Yet Mr. Noel said nor did anything to even resemble a defense attorney. Judge Kellam allowed edited version of a taped conversation between the child and her mother. Also Judge Kellam allowed the Prosecutor too bring in to my case a knife found under my seat, the knife wasn't part of my case. She was allowed by my attorney and the judge to put a huge picture of it on the screen and huge picture of my naked privates in a full courtroom and open court. Ms. Fawcett says to jury see how easy Mr. Major could reach the knife and cut his Childs throat. Even though I had no weapons charge against these cases. This gave the jurors prejudice thought against me thinking I threatened her with that knife and how scared she would of been knowing i could get it and kill her. On my sentencing court March 19, 2014 my public defender told Judge Kellam he wish to resign from being my attorney and wished for the court to give me outside council to file a error to trial or appeal. We were denied. Now after openly knowing my public defender don't want to represent me he has to. Well when as parents we make our kids clean a room when they really don't wish to, well the child will but don't mean she will do a good job, that's where I'm at with Mr. Noel. please dont ignore mine and my families pleas for your help . we have all the legal proof you could need to prove Im innocent. Please dont make my spend years in prison innocent when you can fix this wrong. Im not saying Im a perfect man or that I was a perfect dad to my 2 children none of us are. Ive made some bad choices in life and I paid for them. But I didnt ever touch or rape my daughter . I love my children with all my heart. And now through needing attention and a ex-wife who told my granny several times she wish she could put me in prison to get me out of their lives. Well my ex finally accomplished her goal. Sad part is she is destroying our daughter with all this horrific lies and things she taught my daughter to say. My daughter will need therapist to ever hope for a chance of a normal life after what she had done to her by her mom and their side of the family. My daughter told everyone even on stand she had a dream months before i supposedly molested her in this dream I was molesting her and when I finally did it matched her dream perfectly. She admitted to watching movies about little girls being molested and watching U-Tube videos about child molesting all before it happened supposedly to her. Doesn't that sound very unusual that a non molested 9 yr old would need to know so much about being molested? The only reason I could think a 9 year old would need so much information is to be prepared to know what to say and be able to say how it felt what took place etc.. So when questioned by authorities she would be prepared. And there again sir if a parent is pre grooming a 9 year old child she would need intimate details . Like telling her daughter about a couple moles on my private area. The child admitted to sneaking my cell and looking many many times at nudes of me and my girlfriend even one where my penis was entering my girlfriends vagina. In that picture my moles are obvious. Yet when prosecutor showed everyone in court my privates and pictures of the moles she said the only way the child would know about them is if she saw them for herself. My attorney once again said nothing about the pictures my child saw. Or could a ex-wife be able to describe my moles to help her case against getting rid of me? I beg you help me. This is my very existence. Ive lost everything , a good job, a wonderful girlfriend, my freedom, but worse thing Ive lost is my children. They were my reason to get up every morning and strive to be better. The wonderful bond I had with my Serenity is gone. After this I would be afraid to even hug her for fear of what next can they do to me. I'm not afraid to tell you I sit here in this cell and try to hold back my tears. Everyone knows you cant show weakness in prison. My life has already been threatened here at Wabash Valley Prison. After only 3 days of arrival. I was tricked into signing a waiver now Im in G Block General Population with 6 child molesting felony charges. Mrs. Hart as a 18 year old I almost died hooked to machines in hospital almost 1 month and now I know that fear was childish compared to this . I cant help but put emotions in this, after all Mrs. Hart Im human and God help Me I never been more afraid in my life. I didnt hurt my little girl I didnt touch her sexually. As much as it shreds me and fills my mind what Im facing I worry more about my mom and granny because of their great love for me mam they are suffering so deeply. I aint done this things but my loved ones suffering right along beside me and If you take my case you will be in essence freeing them also. I sent momma this letter and asked her to email it to you. I'm scared I have been done so unjustly by our legal system and I need you to fix this and give me freedom. I ask you please don't just ignore my pleas. Here in America its nice to be able to trust our legal justice system, well they destroyed my and my loved ones trust in our justice system . And I'm trusting in You !!! My entire family is suffering this nightmare with me. My 77 year old granny had a stroke and isn't doing so well. My single mother that raised 3 kids alone is dying from Lupus and since my arrest has stayed so sick and weary. Our lives torn to peices by a government I was taught I could trust in. my momma has tried so many innocent project and wrongfully accused and cant get anywhere. please please help me. A quote from the late Nelson Mandela: To be free is not merely to cast off ones chains, But to live in a way that respects and enhances The Freedom Of Others. I have Faith in you and your clinic to cast my chains off and give me freedom I do deserve as a wrongfully accused Man, son, brother, father, friend. Matthew Major DOC# 246179 Cause # : 53c02-1308-FA-000779 God Bless you. Please contact me with your decision so I know you made a life changing decision for me , just please at least write me so I know you care enough about your citizens to respond to cries for your help. You can speak openly with my mother Charlotte Spain (828) 476-0406: 71 Lakeview Dr. Canton, NC 28716 Thank You Matthew Major I know yall get thousands of request and inmates claiming innocence, and each person who are innocent deserve to have organizations like yours willing to fight for them and I give yall so much Thanks and I thank God everyday yall are out there caring enough to help free the innocents. Since discovering firsthand how easily lives and families can be destroyed by Poor Defense attorneys not doing their job . And Prosecutors allowed to do as they please in court

  5. Frankly, it is tragic that you are even considering going to an expensive, unaccredited "law school." It is extremely difficult to get a job with a degree from a real school. If you are going to make the investment of time, money, and tears into law school, it should not be to a place that won't actually enable you to practice law when you graduate.

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