Sunday, January 3, 2010

Undue Hardship? What Does that Mean??? Where Can I sign up???

Jerry, a reader of this blog, suggested that read this article. Man, it was dense as hell. In order to give it real justice, I need to print it out and study it. However, I felt that I needed to address the issue now. I've had more than a few readers express extreme desperation stemming from defaulting on their student loans so I wanted to put the article out there for people in that situation to STUDY in detail and, perhaps, devise a plan to discharge their student loans. I have to preface this post by saying that there's an ice cube's chance in hell that discharge is possible under the current laws. But it's possible. Let's say there's a 1% chance. I previously mentioned a bill that was put before Congress by Senator Durbin and I was unsure as to the result of the bill. This article gave the answer I was looking for:  

"... Politicians did not go far enough in their efforts... One need only look to congressional inaction on a little-heralded, yet extremely significant, bill that Senator Richard Durbin introduced on June 7, 2007 (the “Durbin bill”): an amendment to the Bankruptcy Code that would allow debtors in bankruptcy to discharge privately issued student loans. Enactment of the legislation would have constituted a unique push-back against the lender lobby, the kind that would have robustly championed the plight of student-loan borrowers. The leak of a document outlining the lobbying strategy of Sallie Mae, the nation’s leading provider of student loans, suggests that Congress may have failed to act on this front due to interest-group capture: Among other things, Sallie Mae’s tactics call for “substantial penetration of ‘first tier’ congressional offices for initial contacts,” hiring a Democratic lobbyist, and “arm[ing] Congressional Republicans and [the] Administration to combat irresponsible proposals.” " 

So, because of lobbyists, it died. Unfortunately, debtors don't have the money to lobby Congress and our failure led to a predictable result. 

"Tragically, Congress disregarded empirical evidence from a General Accounting Office study which found that less than one percent of all federally insured and guaranteed student loans were discharged in bankruptcy."  

When I said 1%, I was not kidding. It's nearly impossible to discharge the debt, and even more impossible to figure out how because of the lose or nonexistent standards. As I have stated before, the laws tightened up in 2005, when Congress fiddled with the bankruptcy code further. 

"By virtue of that legislation, for-profit lenders have been extended the special treatment that had been traditionally reserved for educational and nonprofit institutions."  

That's right. Prior to 2005, it may have been possible to discharge private loans. But now, they have the same protection as federal loans. I knew I hated George Bush for many reasons. I blame him for the War(s) and the Economy and his general idiocy.  

Now, I have one more thing to add to the list: "In February 2008, as the House of Representatives considered a bill to amend the Higher Education Act of 1965, it struck down a proposed amendment to the bill that would have made private student loans once again dischargeable in bankruptcy. Shortly thereafter, President Bush signed legislation in May 2008 that, in its current form, authorizes the Education Department through July 1, 2010 to buy certain federally guaranteed student loans that lenders cannot sell as securitized debt."  

I mean, really? Are you serious? Is that necessary? Is everything to big to fail? The article focuses on the 9th Circuit (West Coast?), but it's still telling of how courts view discharging of bankruptcy. 

They use the Brunner Test "which requires the debtor to establish that, on the basis of current income and expenses, repayment of the educational debt will preclude the debtor from maintaining a minimal standard of living. Put another way, the debtor must establish a current inability to repay his or her student loans by reference to a certain threshold quality of life—namely, a minimal standard of living. The U.S. Bankruptcy Appellate Panel of the Ninth Circuit (the Ninth Circuit BAP) has framed this inquiry as a function of whether requiring of the debtor an income increase or expense reduction would be unconscionable."  

I guess being a lawyer is like football. On any given sunday, a lawyer can score big and get a huge award in court or meet the right person and get a fatty job. But is it likely? I doubt that any court would give a lawyer the benefit of the doubt in this respect.  

And what is a minimal standard of living???? Well, the 9th Circuit kinda sorta answers that question: "While the Ninth Circuit BAP and the U.S. Bankruptcy Court for the Western District of Washington (the Western District of Washington) have refused to interpret the concept of a minimal standard of living as requiring a debtor to live at or below poverty, the Ninth Circuit BAP has made it clear that discharge will not be granted solely because the debtor may have to undertake “major personal and financial sacrifices,” including abandoning a middle-class standard of living.""  

Well, abandoning a middle-class standard of living SOUNDS LIKE poverty level. $10830, Folks. Yep. That's what they are expecting of you.  

This all seems so wishy washy. Why can't there be a hard and fast rule? Instead, the 9th Circuit has a list of factors that they consider: "Well aware that crystal-ball gazing may inherently be undisciplined, the Ninth Circuit has attempted to impart some measure of consistency in the future inability inquiry by setting forth a list of nonexhaustive “objective factors” that it assumes will be good predictors of such inability. Such factors include: (1) serious mental or physical disability of the debtor or the debtor’s dependents; (2) the debtor’s obligation to care for dependents; (3) lack of or severely limited education; (4) poor quality of education; (5) lack of usable or marketable job skills; (6) underemployment;  

So, I'm presuming that a 4th Tier may qualify you. But if you pass the bar, then how can any court say that you did not receive a quality education? So, maybe the answer is that one can discharge their debt if they meet the above factors and never passed the bar. As for marketable skills, everyone knows that law school gives you NONE. All of our skills are learned on the job. Maybe being suicidal will help as well.  

But wait, there's more: "(7) maximized income potential in the debtor’s chosen educational field and no other lucrative job skills; (8) a limited number of years remaining in the debtor’s work life to allow repayment; (9) age or other factors that prevent retraining or relocation that would facilitate repayment; (10) lack of assets to repay the loans (whether exempt or not); (11) potentially increasing expenses that outweigh potential appreciation in the value of the debtor’s assets and/or likely increases in the debtor’s income; and (12) the lack of better financial options elsewhere."  

So, what this tells me is that you're really not likely to have your student loans discharged if you're a young person. The courts want you to fuck up your whole life before they give you a chance to start fresh. Why would age and "limited number of years remaining in debtor's work life" be a factor. If you have a limited amount of time to work, then just stop paying and die. That will be an automatic discharge of the debt. The article went into all sorts of studies with different variable and the various success rates. I really don't have time to get into that here, but please do read it if you are going to attempt to have your student loan discharged.  

But the author also goes into factors that SHOULD be considered, but are not: "We would expect that the following financial characteristics—mea- sured as of or after the date that the adversary proceeding was filed—would be... significant predictors of a debtor’s current inability to repay his or her student loans: (1) the debtor’s monthly household income;142 (2) the debtor’s monthly household expenses;143 (3) the debtor’s monthly dispos- able household income; (4) the poverty ratio;145 and (5) the debt-to-income ratio."  

They also go on to say that "...none of these characteristics is statistically signifi- cantly associated with the extent of discharge obtained by the debtor."  

Of course, the article ends with the truth that we all know: "If we are to restore the higher education finance system to a harmonious state, congressional reform efforts need to begin by giving student-loan debtors in bankruptcy unfettered access to a fresh start."  



  1. Great post, Angel. It would be nice if Obama and Congress cared more about Americans than banks. I know a few lawyers who are seriously considering leaving the country so they don't have to pay their loans back.

  2. Right now I scrape together barely enough to eat ramen noodles by helping people who are financially far healthier than I am to file bankruptcy.

    That said, there is ONE potential way out for some people that I've seen - five years as a teacher in a qualified low income area school grants a student loan discharge. It's what I'm looking into now as my "Last Resort Move." Yes, it's not law - that's why it may be possible to actually get lower middle class level employment. Combine this with income-contingent repayment programs. Most of us do not have a teaching credential (I don't), but most states have alternate programs to credential grads. I do not know off the top of my head if this helps with private loans though - mine are all federal, and they do qualify, at least. Do not try this in California - there are no teacher gigs here; but there are about 40 states in which this may still be viable.

  3. So, are you a solo? Are you abandoning the practice altogether to be a teacher?

  4. Unfortunately, the loan forgiveness for teachers only applies to Stafford loans and it looks like it is capped at $17,500 (and only $5,000 if you're not a SpEd, math, or science teacher).

    Alas, it almost got my hopes up for a minute.

  5. I've never gotten the logic behind nondischarability. Bankruptcy exists specifically to help losers. And I don't mean that in a personal sense, but financial losers, who need to get a fresh start so they can do something else. Many make it in law, some don't, and locking those that don't to their loans keeps them from doing something else.

    It is an unmitigated social good to allow flexability after making a bad, even really bad, choice - whether starting a business of pursuing an education that didn't pan out. Our government and society is truly f-ed. Dubai-lite here we come.

    Costa Rica can expect a surge of American ex pat lawyers.

  6. me thinks attorneys will become homeless and live on street corners in the USA, not in Costa Rica.

  7. It is certainly a shitty situation to have massive debt, little/no income, and almost no way to discharge it.

    On the other hand, don't you think they kind of have to make it difficult (not as difficult as it is, mind you, but they can't make it easy)? If it were easy, then kids would just go to the most expensive school they could get into, sit around playing their X-box for a year, then file for bankruptcy to start from scratch.

    Who cares if it's a black mark on your record for 10 years (or whatever it is)'re only 25!

    It's a tough situation...don't you think it started out with good intentions? Uneducated young people need an education but can't yet afford it because...they're uneducated! So you loan them the money to get educated, whereby they can pay off the loan and then make a high-ish salary that they get to keep all for themselves afterwards.

    Of course, lately we've been in a situation where it doesn't quite work. But it's a huge will take time to adjust. It will adjust eventually, but, unfortunately, the current group is going to feel some pain until it does.

    I'm curious as to whether any economists have written articles on the student loan / bankruptcy issue. Know of any? I would be very interested to read what kind of solutions they propose (not for the future borrowers, as the rules should be changed now so both the lenders and the borrowers go into it knowing that the debts can be discharged) for the people that got caught in this bubble.

    If there are any articles, books, etc. out there, let me know!


  8. No Doug, I don't think they "kind of have to make it difficult." From reading the law review article, you'd see that history has proven that students did NOT file bankruptcy en masse when it was available as an option. The lender lobby did a great job of scaring Congress into thinking it was a problem, though only one-half of one percent of student borrowers were filing soon after graduation.

    What bankruptcy protection for student borrowers DID do was keep schools and lenders honest. With lenders facing no threat of discharge and having their federal loans guaranteed by the government (where the lender actually makes MORE money when a borrower defaults), there is absolutely no incentive for lenders to lend as much as possible - and the result of that endless flow of money is that schools have no incentive to keep tuition reasonable/at parity with the inflation rate.

    Do you understand that, even absent any grants or scholarships, an undergrad could easily pay his/her entire way through school, including living expenses, just a couple decades ago? Asking someone to do that today, without grants, scholarships, or familial help, is just a laughable proposition. The reason that bankruptcy filing among college grads wasn't a problem then is because the loan burden wasn't NEARLY as much as it is today!

  9. Correction above: "there is absolutely no incentive for lenders NOT to lend as much as possible..."

  10. I agree with Jerry. If student loans are dischargeable, lenders are incentivized to limit their lending to students so that those students have little incentive to engage in the X-box scenario described above.

    Lenders are also incentivized to severely limit or even refuse loans for attendance at lower ranked law schools which do not offer much in the way of job prospects.

    These things are exactly what we want to have happen.

    Anyway, as Jerry alluded to, student loans are much more for the benefit of colleges than students. Because colleges have the ability to set tuition levels as to soak up all of the loans available to students.

  11. Totally agree Jerry and Anon, 4:45 A.M. I wrote about this very issue back in September. it's the education bubble and I can't wait for it to pop.

  12. So what about federal loans contracted for and spent prior to 1998, or private loans contracted for and spent prior to 2005? Any arguments of ex post facto, bankruptcy as constitutional right?

  13. Well. I can't say for sure. But I would assume that student loans would fall into the same category as any unsecured debt (such as credit card debt). It's not when you entered the debt that governs, but when you file for bankruptcy. When you sign a student loan, the issue of bankruptcy is not addressed, so I doubt that there are contractual protections in place that address it. That's my basic understanding.

  14. Are these the Jerry comments that I was afraid to respond to?

    If so, I suppose I didn't because a) I didn't come back to this post, and b) I agree with Jerry and always have said so.

    I have, in every post where I've mentioned it, said that from this point FORWARD, student loan debt should be able to be discharged in bankruptcy. What I also said is that I don't think it should apply retroactively because those that took on that debt did so voluntarily.

    Of course the lenders were willing to shovel out more and more cash to students when they knew it was safe to do so. But those were the rules when they made the contract with the can't go back and change it on them after the fact because you don't like the consequences.

    I don't know how much clearer I can make this.

    Oh, and it also seems like this is where the X-Box comment started. Can't you see that I was referring to a potential student who borrowed money with the intention of filing for bankruptcy rather than repay it and not describing myself?

    Of course everyone hates me, because I'm providing a dose of reality here.




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