ILNews

Bankruptcy discharge pushed for school debt

Back to TopCommentsE-mailPrintBookmark and Share

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.

ADVERTISEMENT

  • 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.

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by

facebook - twitter on Facebook & Twitter

Indiana State Bar Association

Indianapolis Bar Association

Evansville Bar Association

Allen County Bar Association

Indiana Lawyer on Facebook

facebook
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. I can understand a 10 yr suspension for drinking and driving and not following the rules,but don't you think the people who compleate their sentences and are trying to be good people of their community,and are on the right path should be able to obtain a drivers license to do as they please.We as a state should encourage good behavior instead of saying well you did all your time but we can't give you a license come on.When is a persons time served than cause from where I'm standing,its still a punishment,when u can't have the freedom to go where ever you want to in car,truck ,motorcycle,maybe their should be better programs for people instead of just throwing them away like daily trash,then expecting them to change because they we in jail or prison for x amount of yrs.Everyone should look around because we all pay each others bills,and keep each other in business..better knowledge equals better community equals better people...just my 2 cents

  2. I was wondering about the 6 million put aside for common attorney fees?does that mean that if you are a plaintiff your attorney fees will be partially covered?

  3. My situation was hopeless me and my husband was on the verge of divorce. I was in a awful state and felt that I was not able to cope with life any longer. I found out about this great spell caster drlawrencespelltemple@hotmail.com and tried him. Well, he did return and now we are doing well again, more than ever before. Thank you so much Drlawrencespelltemple@hotmail.comi will forever be grateful to you Drlawrencespelltemple@hotmail.com

  4. I expressed my thought in the title, long as it was. I am shocked that there is ever immunity from accountability for ANY Government agency. That appears to violate every principle in the US Constitution, which exists to limit Government power and to ensure Government accountability. I don't know how many cases of legitimate child abuse exist, but in the few cases in which I knew the people involved, in every example an anonymous caller used DCS as their personal weapon to strike at innocent people over trivial disagreements that had no connection with any facts. Given that the system is vulnerable to abuse, and given the extreme harm any action by DCS causes to families, I would assume any degree of failure to comply with the smallest infraction of personal rights would result in mandatory review. Even one day of parent-child separation in the absence of reasonable cause for a felony arrest should result in severe penalties to those involved in the action. It appears to me, that like all bureaucracies, DCS is prone to interpret every case as legitimate. This is not an accusation against DCS. It is a statement about the nature of bureaucracies, and the need for ADDED scrutiny of all bureaucratic actions. Frankly, I question the constitutionality of bureaucracies in general, because their power is delegated, and therefore unaccountable. No Government action can be unaccountable if we want to avoid its eventual degeneration into irrelevance and lawlessness, and the law of the jungle. Our Constitution is the source of all Government power, and it is the contract that legitimizes all Government power. To the extent that its various protections against intrusion are set aside, so is the power afforded by that contract. Eventually overstepping the limits of power eliminates that power, as a law of nature. Even total tyranny eventually crumbles to nothing.

  5. Being dedicated to a genre keeps it alive until the masses catch up to the "trend." Kent and Bill are keepin' it LIVE!! Thank you gentlemen..you know your JAZZ.

ADVERTISEMENT