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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. Have been seeing this wonderful physician for a few years and was one of his patients who told him about what we were being told at CVS. Multiple ones. This was a witch hunt and they shold be ashamed of how patients were treated. Most of all, CVS should be ashamed for what they put this physician through. So thankful he fought back. His office is no "pill mill'. He does drug testing multiple times a year and sees patients a minimum of four times a year.

  2. Brian W, I fear I have not been sufficiently entertaining to bring you back. Here is a real laugh track that just might do it. When one is grabbed by the scruff of his worldview and made to choose between his Confession and his profession ... it is a not a hard choice, given the Confession affects eternity. But then comes the hardship in this world. Imagine how often I hear taunts like yours ... "what, you could not even pass character and fitness after they let you sit and pass their bar exam ... dude, there must really be something wrong with you!" Even one of the Bishop's foremost courtiers said that, when explaining why the RCC refused to stand with me. You want entertaining? How about watching your personal economy crash while you have a wife and five kids to clothe and feed. And you can't because you cannot work, because those demanding you cast off your Confession to be allowed into "their" profession have all the control. And you know that they are wrong, dead wrong, and that even the professional code itself allows your Faithful stand, to wit: "A lawyer may refuse to comply with an obligation imposed by law upon a good faith belief that no valid obligation exists. The provisions of Rule 1.2(d) concerning a good faith challenge to the validity, scope, meaning or application of the law apply to challenges of legal regulation of the practice of law." YET YOU ARE A NONPERSON before the BLE, and will not be heard on your rights or their duties to the law -- you are under tyranny, not law. And so they win in this world, you lose, and you lose even your belief in the rule of law, and demoralization joins poverty, and very troubling thoughts impeaching self worth rush in to fill the void where your career once lived. Thoughts you did not think possible. You find yourself a failure ... in your profession, in your support of your family, in the mirror. And there is little to keep hope alive, because tyranny rules so firmly and none, not the church, not the NGO's, none truly give a damn. Not even a new court, who pay such lip service to justice and ancient role models. You want entertainment? Well if you are on the side of the courtiers running the system that has crushed me, as I suspect you are, then Orwell must be a real riot: "There will be no curiosity, no enjoyment of the process of life. All competing pleasures will be destroyed. But always — do not forget this, Winston — always there will be the intoxication of power, constantly increasing and constantly growing subtler. Always, at every moment, there will be the thrill of victory, the sensation of trampling on an enemy who is helpless. If you want a picture of the future, imagine a boot stamping on a human face — forever." I never thought they would win, I always thought that at the end of the day the rule of law would prevail. Yes, the rule of man's law. Instead power prevailed, so many rules broken by the system to break me. It took years, but, finally, the end that Dr Bowman predicted is upon me, the end that she advised the BLE to take to break me. Ironically, that is the one thing in her far left of center report that the BLE (after stamping, in red ink, on Jan 22) is uninterested in, as that the BLE and ADA office that used the federal statute as a sword now refuses to even dialogue on her dire prediction as to my fate. "C'est la vie" Entertaining enough for you, status quo defender?

  3. Low energy. Next!

  4. Had William Pryor made such provocative statements as a candidate for the Indiana bar he could have been blackballed as I have documented elsewhere on this ezine. That would have solved this huuuge problem for the Left and abortion industry the good old boy (and even girl) Indiana way. Note that Diane Sykes could have made a huuge difference, but she chose to look away like most all jurists who should certainly recognize a blatantly unconstitutional system when filed on their docket. See footnotes 1 & 2 here: http://caselaw.findlaw.com/us-7th-circuit/1592921.html Sykes and Kanne could have applied a well established exception to Rooker Feldman, but instead seemingly decided that was not available to conservative whistleblowers, it would seem. Just a loss and two nice footnotes to numb the pain. A few short years later Sykes ruled the very opposite on the RF question, just as she had ruled the very opposite on RF a few short years before. Indy and the abortion industry wanted me on the ground ... they got it. Thank God Alabama is not so corrupted! MAGA!!!

  5. OK, take notice. Those wondering just how corrupt the Indiana system is can see the picture in this post. Attorney Donald James did not criticize any judges, he merely, it would seem, caused some clients to file against him and then ignored his own defense. James thus disrespected the system via ignoring all and was also ordered to reimburse the commission $525.88 for the costs of prosecuting the first case against him. Yes, nearly $526 for all the costs, the state having proved it all. Ouch, right? Now consider whistleblower and constitutionalist and citizen journalist Paul Ogden who criticized a judge, defended himself in such a professional fashion as to have half the case against him thrown out by the ISC and was then handed a career ending $10,000 bill as "half the costs" of the state crucifying him. http://www.theindianalawyer.com/ogden-quitting-law-citing-high-disciplinary-fine/PARAMS/article/35323 THE TAKEAWAY MESSAGE for any who have ears to hear ... resist Star Chamber and pay with your career ... welcome to the Indiana system of (cough) justice.

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