Student Debt

Conventional wisdom has it that you cannot discharge your student-loan debt when you file for bankruptcy. Like most conventional wisdom, that’s wrong.

There’s the dirty secret lenders don’t want you to know

According to a Harvard study by Jason Iuliano, at least 40 percent of those who included student loans in their bankruptcy had all or some of the debt discharged. Essentially what they had to do was, as part of the bankruptcy, also file what is called a Complaint to Determine Dischargeability.

The real problem, Iuliano found, wasn’t the law. It was that only 0.1 percent of bankruptcy filers with student loans did include them. The rest either believed that the bankruptcy process didn’t allow any procedures for also eliminating or reducing student loan debt. Like child support and criminal fines, it was assumed that the debt was off the board. Or, they decided that it would be too difficult to present their case.

Of course, it should be no surprise that those debtor mindsets are exactly what lenders, both federal and private, want you to have.  About $1.2 trillion in student-loan debt is at stake. And more is likely to be added – soon. As yet there has been no solution to the ongoing increase in tuition and fees.

No surprise either is that when the bankruptcy courts approve the discharge, those lenders often will push back on the decision. And this may shock you: The courts frequently will favor you,Q the debtor. Recent examples of that include “Myhre v. Department of Education” and “Roth v. Educational Credit Management Corporation.”

Going bankrupt has grim consequences

Not that bankruptcy should be taken lightly. The consequences for your credit rating are harsh. Your bankruptcy can officially be on your financial records for a decade. Some credit agencies will remove it after seven. That affects much of your life, ranging from your ability to rent an apartment to getting hired for a job. Some employers interpret a bankruptcy as a lack of responsibility.

The good news is that once this debt is wiped clean, you will again become eligible for federal financial aid. Yes, you could resume your education. The story might be different with private lenders. They are a lot more wary. The experts advise you to consult with the financial aid personnel at your school as well as the private lenders themselves about future funding.  

Taking out student loans is serious business

Also, as lenders, such as Sallie Mae, emphasize, you must do your due diligence before contracting to borrow funds for educational purposes. There are so many choices. The terms and conditions, including interest rates, for each must be explored.  For the undergraduate class of 2015, the average loan debt was $35,000. For advanced degrees, such as law, much higher.

You made a commitment when taking on debt

David Harrison is a recent law graduate for whom it took several years to find legal work. “With full knowledge of the obligation and potential consequences,” Harrison told MyBankTracker, “I took loans for law school and feel honor-bound to repay them, even if it is stressful, as it sometimes is. While I understand they sometimes can be discharged in bankruptcy, I think the debtor should make it his or her moral business to try to repay those loans, or any loans, for that matter – when eventually able. Ultimately – and in contrast to the declared beliefs of Donald Trump – who, giving the ‘game’ away, said his quadruple bankruptcies were strategic decisions – a loan is not about finances. It is about character.”

Harrison is not alone in his commitment to honor the deal he made. Back in 2003, Elie Mystal graduated Harvard Law School close to $150,000 in debt. Lots of things went wrong, including not liking practicing law. And right, like wanting to marry his sweetheart. There were deferments and defaults but he’s still determined to pay the loans back. An unintended consequence of that debt has been it’s helped establish him as a celebrity journalist at

But then life intervened

But there are those of you who have assessed that repaying the loans is impossible. The familiar way to sum that up is: Life intervened. Things didn’t turn out as so carefully planned. You are in the kind of debt that overwhelms. Debt collectors are calling at all hours.  Your physical and mental health may be on a downward trajectory. Under such pressures a MyBankTracker survey found students  willing to give up important possessions,  even body parts,  to clear debt.  

So, you are filing for bankruptcy. And you now know you can include all or some of your student-loan debt. Your challenge is proving your inability to pay in court. You will attempt to do that through an adversary procedure, that is, a lawsuit within the bankruptcy case.

You have to pass three tests

Essentially that consists of “passing” the three-part Brunner Test. Another test used, only in the Eighth Circuit, is The Totality of the Circumstances Test. In concepts it is similar to Brunner when applied to student loan discharge.

If your judge relies on the Brunner test, essentially you have to demonstrate all three of the following.

  • Repayment over the long term would cause you and any dependents “undue hardship.” The problem with that is that there are no standard criteria for determining what undue hardship is. Each bankruptcy judge has a lot of latitude. That’s why it’s probably necessary to hire a local bankruptcy lawyer who is familiar with the judges’ mindsets and track records in rulings.
  • Your dire financial state of affairs is projected to persist indefinitely. For example, the only jobs available in your location pay minimum wage and that won’t support you and your four dependents.
  • Effort has been made to repay the loans. For example, you didn’t purchase a new car instead of making regular payments.

Overall, your biggest hurdle in this process is the ambiguity of the concept “undue hardship.” Over the years, there have been times when Congress was sympathetic to debtors. Some members tried to put together a standard definition. That never happened, though. So, how the concept was to be defined was left in the hands of bankruptcy judges. Of course, that gives them tremendous wiggle room in their decision-making.

Your lawyer might inform you that all the judges who could be presiding over the case in your jurisdiction define “undue hardship” in a way that’s not favorable to you. Then you might have to decide not to even attempt to discharge your student-loan debt as part of the bankruptcy.

There are many other options for managing the debt

Fortunately, there are other tactics to eliminate the debt, significantly reduce it, or make the monthly payments affordable. Given that 17 percent of you are behind in payments or have defaulted, the number of those options keeps growing.

A common one for canceling the whole debt is to be certified as having a permanent disability. A mental illness is often approved. To reduce the amount of the monthly payment there is the income-driven plans. Lawyers who become journalists usually apply for and get that one.

Some of those options are available for all kinds of student loans. Some only for federal loans. Some apply only to private lenders. Here is a backgrounder on that from Federal Student Aid, an Office of the U.S. Department of Education.

Help may be on the way

Right now you may be in severe financial hardship. Yet, you are unsure about the odds of having your student debts discharged if you file for bankruptcy. Well, there are two reasons to hope that reforms in your favor will happen.

In Campaign 2016, student loans are already a high-profile issue. But discharge through bankruptcy is not on the radar. You can put it there. The burden is on you to become the lobbyist. Through social media you can open up the conversation about what could be done. Should the criteria for “undue hardship” be standardized? Or is a comprehensive overhaul needed?

The second possible path to reform could be through the U.S. Supreme Court (SCOTUS). On January 8th of this year, the justices met to decide whether or not to review Mark Tetzlaff’s filing for a discharge of his student loans.

Here is the background. Earlier, the bankruptcy court ruled that repayment of student loans would not create an undue hardship. Later the District Court and the U.S. Court of Appeals upheld that ruling. At age 57, Tetzlaff is unemployed and suffers from clinical depression and alcoholism. Previously, when he wasn’t studying for advanced degrees which for him were unmarketable, he held dead-end jobs. He lives with his mother, existing on her Social Security.

That his negative economic circumstances didn’t result in discharge of his loans seems confirmation that the system is broken. SCOTUS could fix the problems with the current two tests. Or it could create new, universal standards for determining eligibility for discharge. That would prevent judges from imposing their idiosyncratic values on these critical financial matters.

Debtors deserve a fresh start

Bankruptcy was created as a tool to give you a second (or third or fourth) chance. That not only applies to your financial matters but also to your overall well-being.

Investing in education is an act of deep faith in the future. But along the way circumstances didn’t play out as planned. You may need a temporary or long-term relief from collection agencies and emotional distress. The way to get that could be through a fair court judgment about the status of your student-loan debt. Currently, that isn’t guaranteed. But it could be.

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