Vermont lawmakers urge Congress to lift bankruptcy restrictions for distressed college-loan borrowers: Bernie Sanders, here's your cue!

Earlier this week, the Vermont House of Representatives adopted a resolution urging Congress to allow distressed student-loan borrowers to file for bankruptcy without restriction. In effect, the Vermont lawmakers asked Congress to repeal the "undue hardship" provision of the Bankruptcy Code.

The measure had broad support among Vermont legislators.  The resolution was sponsored by more than 70 of  the Vermont House's 150 representatives.

This is an amazing development. Everyone knows the federal student loan program is in crisis and that millions of college-loan borrowers are burdened by massive debt they can't pay back. Congress won't do anything about it because our federal legislators have been bought off by the college industry and the banks. Now we have a state legislative body asking for bankruptcy relief.

Joint House Resolution 27, as the Vermont resolution is titled, is remarkable for its clarity.  As the resolution stated: "27 million borrowers are either in default or some other form of loan repayment delinquency . . . "  Moreover, the Vermont legislators pointed out, plans to reduce interest rates or restructure the student loan program might be helpful to future borrowers, but these proposals do nothing to help people who are suffering right now.

I hope other state legislatures across the United States will follow the lead of the Vermont House of Representatives and call for the elimination of bankruptcy restrictions for desperate college-loan borrowers.  Multiple state-level legislative resolutions would put huge pressure on Congress to quit doing the bidding of the college industry and amend the Bankruptcy Code.

And here is an opening for Bernie Sanders.  If he would endorse Joint House Resolution 27 and call for a reform of the Bankruptcy Code, he would attract even more voters.  At the very least, Bernie's endorsement might force Hillary Clinton to endorse Resolution 27 as well.  So far, her only plan for reforming the federal student loan program is to shovel more money toward the inefficient, corrupt, and venal higher education industry.

Hooray for the state legislators in Vermont.  Bernie, please jump on board. The time for action is now.

Vermont lawmakers urge Congress to lift restrictions on bankruptcy for student-loan borrowers

References

Micahel Bielawski. Vermont House asks Congress to let student-loan borrowers file for bankruptcy. VermongtWatchdog.org, May 3, 2016.  Accessible at http://watchdog.org/264079/legislature-requests-student-debt-relief-bankruptcy/

Tetzlaff v. Educational Credit Management Corporation: The Seventh Circuit made a mistake when it refused to discharge a quarter of a million dollars in student-loan debt owed by an umemployed 56-year old man living on his mother's Social Security check

The Seventh Circuit Court of Appeals got it wrong when it affirmed a lower court ruling against Mark Tetzlaff, an unemployed 56 year-old man who tried to discharge $260,000 of student-loan debt in bankruptcy. Mr. Tetzlaff filed a petition for certiorari in October with the U.S. Supreme Court, seeking to have the Seventh Circuit's decision overturned. I hope the Supreme Court agrees to hear his case.

The Seventh Circuit applied the Brunner test too harshly.

In ruling against Tetzlaff, the Seventh Circuit determined that requiring Tetzlaff to repay more than a quarter of a million dollars in student-loan debt would not cause him "undue hardship." To reach this bizarre conclusion, the court applied the three-part Brunner test, which required Tetzlaff to show:

1) [He could] not maintain, based on current income and expenses, a minimal standard of living . . . if forced to repay [his] loan;

 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period;

3) [he] made good faith efforts to repay the loans. 

 At the time Tetzlaff filed his adversary hearing, he was 56 years old, unemployed, and living with his mother. Both he and his mother subsisted entirely on his mother's Social Security check. Thus, the court admitted that Tetzlaff met the first prong of the Brunner test: he could not pay back his student loans and maintain a minimal standard of living.

But the Seventh Circuit panel ruled that Tetzlaff had not meet the second prong of the Brunner test.  According to the court,Tetzlaff was required to show "the certainty of hopelessness" concerning his financial future.  In essence, the court predicted that Tetzlaff's financial situation will probably improve. After all, the court noted, "he has an MBA, is a good writer, is intelligent, and family issues are largely over" (quoting the lower court's opinion).

Moreover, in the Seventh Circuit's view, Tetzlaff had not made good faith efforts to pay back his loans, a requirement of the Brunner test's third prong.

Although Tetzlaff may not have made sufficient efforts to repay the $260,000 he was trying to discharge in bankruptcy, he had also borrowed money to attend Florida Coastal Law School; and he had paid back his law school loans. Tetzlaff argued in court that his successful effort to pay off his law-school loans showed his good faith,

But the Seventh Circuit did not buy Tetzlaff's argument.  In the court's view, Tetzlaff had not made a good faith effort to repay the $260,000 he owed to Educational Credit Management Corporation, the agency that was fighting Tetzlaff's bankruptcy discharge. Thus he failed the third prong of the Brunner test.

Where the Seventh Circuit went wrong: Low Job Prospects for Law Graduates

In my view, the Seventh Circuit erred when it refused to discharge Tetzlaff's student loan debt. 

First of all, a 56-year old man who is unemployed and has significant mental health issues (as he testified in court) will never pay back more than a quarter of a million in student-loan debt--a debt that is growing larger by the day due to accrued interest. The court would have ruled more realistically and more compassionately if it had applied the principle laid down by the Ninth Circuit's Bankruptcy Appellate Panel in its 2013 Roth decision: "[T]he law does not require a party to engage in futile acts." 

It is true Tetzlaff holds an MBA and a law degree, but these credentials are no guarantee of a good job, particularly given his age, his employment history, and his mental health issues. In fact, Tetzlaff's law degree may be almost worthless.  

As Paul Campos wrote in his 2012 book, Don't Go To Law School (Unless), the job market for lawyers is terrible. Indeed, Campos observed, "[L]aw schools are now producing more than two graduates for every available job."

And Tetzlaff's prospects for a legal job are especially dire since he failed the bar exam twice. In addition, he graduated from Florida Coastal Law School, one of the nation's bottom-tier law schools with very low admissions standard. According to Law School Transparency, a public interest group, 50 percent of Florida Coastal's 2014 entering class were at extreme risk of failing the bar exam based on their LSAT scores.

Law School Transparency pointed out that graduates of law schools with low admission standards have a much harder time obtaining employment than graduates from more prestigious law schools. "Legal job rates are considerably worse at the serious risk schools," Law School Transparency's report stated. "A serious risk school is 4 times as likely to have a below average legal job rate. Nearly three-quarters of schools with employment rates below 50% were serious risk schools."

Law School Transparency's recent report shows that borrowing money to attend a law school with low admissions standards is not a good bet. "Based on available salary data from serious risk schools, graduates from these programs cannot service their debts without generous federal hardship programs."

Nevertheless, Tetzlaff was wise to pay off his law-school debt first, since the law school would not release his diploma to him unless he paid that debt. And without a diploma, he would be unable to take the bar exam. In fact, Tetzlaff had no real choice in prioritizing his law school debt over his other student loan debt.

It is truly unfortunate that the Seventh Circuit showed both lack of compassion and lack of understanding by penalizing Mr. Tetzlaff for making the only sensible financial decision he could make.  He simply had to make paying his law-school debt a priority in order to have any hope of ever practicing law.

The Court Should Not Have Allowed ECMC to accuse Tetzlaff of being a malingerer

Educational Credit Management Corporation, perhaps the nation's most heartless and ruthless student-loan debt collector, opposed the discharge of Tetzlaff's student-loan debt, and it hired Dr. Marc Ackerman, a forensic psychologist, to bolster its case. Ackerman performed tests on Tetzlaff and testified that Tetzlaff "'scored very high on several malingering scales,' indicting that Tetzlaff was perhaps feigning his psychological symptoms."

I find it outrageous that Educational Credit Management Corporation's hired a forensic psychologist as a means of suggesting Tetzlaff is a malingerer. ECMC has fought bankruptcy relief for distressed student-loan debtors all over the United States, and its chief executives have grown rich in the debt collection business. For ECMC to force an unemployed man in his mid-50s to take a psychological exam in a bankruptcy proceeding to determine whether he is a malinger is detestable.

It is true that Tetzlaff introduced testimony about his mental health issues, but I don't think that gives ECMC license to use an expert witness to essentially attack his character. In my opinion, the bankruptcy court should have excluded the forensic psychologist's opinion on the grounds of common decency.

And if we are going to be looking into people's mental health, let's check the mental health status of the ECMC officials who opposed bankruptcy relief for Jane Roth, a 68-year-old woman with chronic health problems who was living solely on the income of a $774 Social Security check. Anyone who would persecute Jane Roth must have serious mental health problems--let's call it chronic undifferentiated greed.

Conclusion: The  Seventh Circuit committed a grave error in deciding the Tetzlaff case

The Tetzlaff decision was a bad decision. Mr. Tetzlaff should be commended for trying to improve his economic prospects by obtaining graduate education, and he should not be penalized because some of his educational choices may have been misguided.

Mr. Tetzlaff probably made a mistake when he borrowed money to attend Florida Coastal Law School.  But he should not suffer a lifetime penalty for mistakes he made in his good faith efforts to obtain an education. And people in bankruptcy should not be required to take psychological tests to determine whether they are malingers.

The Department of Education needs to rein in Educational Credit Management Corporation by insisting that it not oppose bankruptcy relief for people like Mark Tetzlaff. Unless it does that, DOE simply cannot continue to say with any credibility that it is trying to relieve the distress of millions of people who are unable to pay back their student loans.

References

Paul Campos. Don't Go To Law School (Unless). Self-published, 2012.
Roth v Educational Credit Management Corp, 490 B.R. 908, 920 (9th Cir. BAP 2013).

Law School Transparency. 2015 State of Legal Education. Accessible at: http://lawschooltransparency.com/reform/projects/investigations/2015/
John Hechinger. Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans. Bloomberg.com, May 15, 2013. Accessible at: http://www.bloomberg.com/news/2012-05-15/taxpayers-fund-454-000-pay-for-collector-chasing-student-loans.html
Tetzlaff v. Educational Credit Management Corporation, 794 F.3d 756 (7th Cir. 2015). Accesible at: http://scholar.google.com/scholar_case?case=900247726541956067&hl=en&as_sdt=6&as_vis=1&oi=scholarr

Old and in the Way: Hundreds of thousands of elderly student-loan debtors are experiencing real financial hardship, and the federal government doesn't care

Old and in the way, that's what I heard them say

They used to heed the words he said, but that was yesterday

Gold will turn to gray and youth will fade away

They'll never care about you, call you old and in the way

Old and In the Way

Lyrics and music by David Grisman

Many Americans think student-loan defaulters are young scofflaws who obtained valuable university degrees and simply refuse to pay back their loans.

But that stereotype could not be further from the truth.

In fact, most of the people who defaulted on their student loans simply fell on hard times. Many acquired their degrees from for-profit universities that charged far too much for substandard educational experiences. Millions of people who attended for-profit colleges found themselves worse off financially after finishing their studies than they were before they enrolled in these sleazy institutions.

Some people borrowed money to obtain undergraduate degrees and were unable to find jobs that paid well enough for them to service their loans. Some of these unfortunate souls doubled down and borrowed more money to go to graduate school.  Those who borrowed to go to law school found a collapsing job market for lawyers.

Other  student-loan borrowers became ill, got divorced or were laid off from their jobs. For a thousand different reasons, millions of student-loan debtors fell off the ladder in their climb toward economic security and never recovered. In short, most people who defaulted on their student loans simply did not have the financial resources to make their loan payments.

And many student-loan defaulters are elderly.

As Natalie Kitroeff reported recently in Bloomburg Business Week, about one out of four student-loan debtors age 65 and older are in default. Half the student loans held by people who are 75 years old or older are in default.  And 155,000 elderly Americans are having their Social Security checks garnished due to defaulted student loans, an enormous increase from 2002, when only 31,000 Americans were having their Social Security checks garnished.

Surely all humane people can agree that the federal government should not be garnishing elderly people's Social Security checks to collect on defaulted student loans. Or perhaps we can't. In the Lockhart decision, the U.S. Supreme Court upheld the government's authority to garnish the Social Security checks of student-loan defaulters. And get this: The decision was unanimous. There were no liberals on the Supreme Court on the day the Lockhart case was decided.

But perhaps humane people can at least agree that the government should not oppose bankruptcy relief for student-loan defaulters who are living on Social Security income of less than $800 a month. But again, perhaps we can't. Educational Credit Management Corporation actually opposed bankruptcy relief for Jane Roth, a 68-year-old woman with chronic health problems who was living on a monthly Social Security check of only$774.

Fortunately, the Ninth Circuit Bankruptcy Appellate Panel was considerably more compassionate than ECMC, and it discharged Roth's student loan debt.

I once thought the Roth decision might bring the federal government to its senses and that it would issue strict orders against opposing bankruptcy relief for student-loan defaulters living entirely off their Social Security checks. But I was wrong.

In fact the Obama administration is ignoring the Roth decision. The Department of Education issued a guidance letter in July 2015 (the Mahaffie letter) outlining when student-loan creditors should not oppose bankruptcy relief for insolvent college-loan borrowers; and it did not even mention the Roth decision.  And the Department of Education's lawyers filed a pleading in a California bankruptcy court last month arguing that the Roth decision is not binding on any bankruptcy court.

For all its blah-blah-blah about providing relief for distressed student-loan debtors, the Obama administration's Department of Education is doing little more than pitching long-term repayment plans whereby student-loan borrowers are forced to make loan payments for 20 or 25 years.

And DOE's lawyers run like hounds to the bankruptcy courts to oppose bankruptcy discharge for insolvent student loan debtors, regardless of their age.

In short, if you are an elderly person who defaulted on your student loans you have no friends in the Obama administration. As far as the President Obama's Department of Education is concerned, you are just old and in the way.


References

Natalie Kitroeff. Student Debt May Be the Next Crisis Facing Elderly Americans. Bloomberg Businessweek, December 18, 2015.  Accessible at:  http://www.bloomberg.com/news/articles/2015-12-18/student-debt-may-be-the-next-crisis-facing-elderly-americans

Lockhart v. United States, 546 U.S. 142 (2005).

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015. Accessible at: https://ifap.ed.gov/dpcletters/attachments/GEN1513.pdf

U.S. General Accounting Office. Older Americans: Inability to Repay Student Loans May Affect Financial Security of a Small Percentage of Borrowers. GAO-14-866T. Washington, DC: General Accounting Office. http://www.gao.gov/products/GAO-14-866T

U.S. Department of Education. Strengthening the Student Loan System to Better Protect All Borrowers.  Washington, D.C., October 1, 2015: Author. Accessible: http://www2.ed.gov/documents/press-releases/strengthening-student-loan-system.pdf

These few, these happy few, this band of brothers and sisters: Going into bankruptcy court without lawyers, a few intrepid souls obtained relief from oppressive student-loan debt

And Crispin Crispian shall ne’er go by,

From this day to the ending of the world,

But we in it shall be remembered-

We few, we happy few, we band of brothers . . .

Henry V

William Shakespeare

More than 20 million people have college loans they can't pay back. For most of them, their oppressive debt grows larger every day, as interest continues to accrue. It is now common for people to owe more than three times the amount of money they borrowed for postsecondary education due to interest, penalties and fees that were tacked on to their original loans.

Had these suffering souls borrowed money to purchase a pizza franchise or buy a house, they could discharge their debt in bankruptcy. Likewise, if they were financially crushed by catastrophic medical expenses or a divorce, they could wipe away their debt through the bankruptcy process.

But because they borrowed money to acquire an education, student-loan debtors cannot discharge their debt in bankruptcy unless they meet the "undue hardship" standard set forth in the Bankruptcy Code--a difficult standard to meet.

In fact, most people are so convinced that it is impossible to discharge student loans in bankruptcy that they don't even try.  Jason Iuliano, in a 2012 law review article, researched bankruptcy court records and found that almost a quarter of a million people with student-loan debt filed for bankruptcy in 2007, but less than 300 of them even attempted to discharge their student loans.

And indeed, discharging student loans in bankruptcy is daunting. Debtors are forced to file an adversary action--in essence, a law suit, against their student-loan creditors. 

Because people in bankruptcy generally have no money, they can't afford to hire an attorney to represent them in an adversary proceeding. In contrast. their debtors--the Department of Education, Sallie Mae, or debt collection agencies like Educational Credit Management Corporation--have lots of experienced lawyers to defend their interests.

Nevertheless, a few intrepid student-loan debtors have filed adversary actions in bankruptcy court and have been successful, and many of them proceeded without lawyers. 

Here are three examples:

Alexandra Acosta-Conniff, an Alabama school teacher and single mother of two, filed an adversary proceeding to discharge $112,000 in student-loan debt. On March 25, 2015, a bankruptcy court ruled in her favor, discharging all her student-loan obligations. Acosta-Conniff won her case without a lawyer.

George and Melanie Johnson, a married couple in their thirties with two school-age children, filed for bankruptcy in Kansas, seeking relief from $83,000 in student loans. In February 2015, a bankruptcy court ruled in their favor. Like Acosta-Conniff, the Johnsons won their case without a lawyer.

Educational Credit Management Corporation, perhaps the nation's most ruthless student-loan creditor, was a defendant in both  cases, and ECMC appealed both rulings. But the bankruptcy judges in both cases wrote persuasive and well-researched decisions,and Acosta-Conniff and the Johnsons have good prospects for prevailing on appeal.

Finally, we have Michael Abney, a single father of two, who borrowed $25,000 to pursue an undergraduate degree he never obtained, and was living on less than $1200 a month. He went to bankruptcy court without an attorney and defeated the Department of Education. Abney's case was decided in November of this year. 

These few, these happy few . . . Let us salute the courage of these brave individuals, who went to bankruptcy court without lawyers and were victorious. And let us salute the bankruptcy judges who rose to their duty to give honest but unfortunate debtors a fresh start--which is the very purpose of the American bankruptcy courts. 

References

Abney v. U.S. Department of Education, 540 B.R. 681 (Bankr. W.D. Mo. 2015).

Acosta-Conniff v. Educational Credit Management Corporation, No. 12-31-448-WRS, 2015 Bankr. LEXIS 937 (Bankr. M.D. Ala. March 25, 2015).

Johnson v. Sallie Mae & Educational Credit Management Corporation, Case No. 11-23108, Adv. No. 11-6250, 2015 Bankr. LEXIS 525 (Bankr. D. Kan. Feb. 19, 2015).

The Department of Education's Lynn Mahaffie wrote a disingenuous letter outlining when the Department of Education will not oppose bankruptcy discharge for student-loan debtors under the Undue Hardship rule

The Department of Education's Lynn Mahaffie issued a letter last July outlining when DOE and its debt collectors will not oppose bankruptcy discharge for student-loan debtors.  In fact, Mahaffie's letter is disingenuous.

Reading Mahaffie's letter, you might think DOE and its debt-collecting lackeys would not oppose a bankruptcy discharge for student-loan debtors who are in truly distressing circumstances or when it would be pointless to try to collect the debt. But you would be wrong.

In fact, DOE and its debt collectors oppose bankruptcy discharge for nearly everyone.

Here are some examples:

In Myhre v. Department of Education, DOE opposed bankruptcy discharge for a quadriplegic student-loan debtor who was working almost full time but could not make enough money to pay his living expenses, including the cost of a full-time caregiver.

In Roth v. Educational Credit Management Corporation, ECMC, perhaps DOE's most ruthless debt collector, opposed a bankruptcy discharge for a 68-year-old woman with chronic health issues who was living on a Social Security check of less than $800 a month.

In Abney v. U.S. Department of Education, decided after Mahaffie's letter was issued, DOE opposed a bankruptcy discharge for a man living on less than $1200 a month and who rode a bicycle to work because he couldn't afford a car.  This poor guy was making child-support payments that almost equaled his take-home pay and had lost his home to foreclosure. In fact, this man's situation was so desperate that he lived for a time in the cab of one of his employer's trucks. And DOE demanded that he be put in a 25-year repayment plan!

Mahaffie's letter listed several factors for determining when to oppose a student-loan debtor's bankruptcy discharge, including the debtor's age and health status. But DOE is garnishing the Social Security checks of 150,000 elderly people and fighting bankruptcy relief without regard to a student-loan debtor's health status. Hey, if DOE fights bankruptcy discharge for a quadriplegic, it fights it for everyone.

And Mayaffie also indicated that DOE and student-loan creditors wouldn't fight bankruptcy discharge if litigation costs outweighed the likely benefits. But in Kelly v. Educational Credit Management Corporation, ECMC chased a student-loan debtor through the federal courts for seven years!

Frankly, Mahaffie's letter is insincere. Contrary to the representations in her letter, the Department of Education and Educational Credit Management Corporation fight nearly every student-loan bankruptcy with almost desperate ferocity.  It knows that millions of people are entitled to bankruptcy relief from their student-loan debt under standards being laid down by compassionate bankruptcy courts. And it knows if student-loan debtors start getting the relief to which they are entitled under basic principles of fairness and justice, the student loan program will collapse.

Lynn Mahaffie, J.D.
DOE's Deputy Assistant Secretary wrote a disingenous letter

References

Lynn Mahaffie, Undue Hardship Discharge of Title IV Loans in Bankruptcy Adversary Proceedings. CL ID: GEN 15-13, July 7, 2015. 

Myhre v. U.S. Department of Education, 503 B.R. 698 (Bakr. W.D. Wis. 2013).

Roth v. Educational Credit Management Corporation, 490 B.R. 908 (9th Cir. BAP 2013).

You can't win if you don't play: More people should attempt to discharge their student loans in bankruptcy

It's a mess, folks. Seven million people are currently in default on their student loans. Millions more have stopped making payments but aren't counted as defaulters because they obtained economic-hardship deferments, which are given out like candy.  Almost 4 million people are making payments under income-based repayment plans that can last as long as 25 years. Twenty-five years!

Why don't some of these overburdened student-loan debtors file for bankruptcy?  I'll tell you why. Most people believe it is impossible to obtain relief from their student loans in the bankruptcy courts.

But that's not true. Three years ago, Jason Iuliano published an empirical study of student-loan discharges under the Bankruptcy Code's "undue hardship" provision. This is what he found:

• Nearly forty percent of people who attempted to discharge their student loans in the bankruptcy process obtained relief.

• People who attempted to discharge their student loans without an attorney were as successful in obtaining bankruptcy relief as people who hired bankruptcy lawyers.

The problem, according to Iuliano, is not that it is impossible to obtain a discharge of student loans in bankruptcy. THE PROBLEM IS THAT MOST PEOPLE DON'T TRY.

In 2007, Iuliano reported, almost a quarter of a million people with student loans filed for bankruptcy (238,446 to be exact). Of that number, less than 300 even attempted to discharge their student loans in bankruptcy. Apparently they assumed that it would be useless to try.

Iuliano constructed a model for predicting which factors were most important in obtaining a student-loan discharge. He estimated that 69,000  student-loan debtors  who filed for bankruptcy in 2007 were good candidates for discharge if they had only applied for relief.

In other words, based on Iuliano's research, more insolvent student-loan debtors should be seeking to discharge their student loans in bankruptcy because a fair percentage are likely to be successful. But you can't win if you don't play. 

Iuliano's article was published in 2012 based on 2007 bankruptcy data. I think the percentage of successful student-loan discharges would be higher today than it was during the period Iuliano studied. Several recent bankruptcy court decisions show that at least some courts are beginning to view student-loan debtors with more compassion than courts once did.

In the Roth case, for example, the Ninth Circuit's Bankruptcy Appellate Panel rejected a loan creditor's argument that Ms. Roth should be put in a 25-year repayment plan. "The law does not require a party to engage in futile acts," the court said.   Roth was a 68-year old woman with chronic health problems living on a Social Security check of less than $800 a month. It would be futile, not to mention callous, to put her on a 25-year income-based repayment plan.

Of course, the Department of Education and its student-loan debt collectors aggressively oppose student-loan discharge efforts in the vast majority of cases, often filing technical motions that make the  discharge process more expensive than necessary. I think  the creditors file these motions to discourage student-loan debtors who file adversary actions without the help of a lawyer. 

Of course, hiring a bankruptcy lawyer to fight the Department of Education can be expensive, and people in bankruptcy generally don't have the money to hire lawyers. Nevertheless, a lot more insolvent debtors should be trying to discharge their student loans in bankruptcy, even if they must do so without a lawyer.

And here are my suggestions for giving overburdened but honest student-loan debtors some bankruptcy relief:

1) Legal Aid clinics should get in the business of representing student-loan debtors. Legal aid clinics, including those that are attached to law schools, should have their attorneys become experts in bankruptcy law--especially the evolving law that relates to student loans; and the clinics should start representing student-loan debtors who seek to discharge their student loans in the bankruptcy courts.

2) Public interest organizations should develop free web sites that would provide useful information to people who are seeking to discharge their student-loans in bankruptcy without lawyers. The site should include sample pleadings and sample discovery motions, recent research on student-loan bankruptcies, recent court decisions, and sample briefs that could be used as models for debtors who are fighting the technical motions that DOE and the debt collectors file. 

Can you imagine the impact if 5,000 people tried to discharge their student loans in the bankruptcy courts rather than the mere 300 who tried in 2007? I think these people would find the bankruptcy courts are much more sympathetic than the debtors might have expected. More and more frequently, the bankruptcy judges are reviewing the details of these pathetic cases and seeing people who borrowed money in good faith to attend college and simply never made enough money to pay it back. Divorce, illness, unemployment, poor choices in deciding on a major, unscrupulous for-profit colleges--all kinds of unexpected things happened to people who simply wanted to get the training they needed to obtain better jobs so they could support their families and have better lives.

As I have said, the bankruptcy courts are becoming more and more sympathetic to these people.  But distressed student-loan debtors have got to ask for bankruptcy relief in order to get it.

References

Jason Iuliano. An Empirical Assessment of Student Loan Discharge and the Undue Hardship Standard. American Bankruptcy Law Journal 86 (2012), 495. 

Roth v. Educational Credit Management Corporation. 490 B.R. 908 (9th Cir. BAP. 2013

Memo to Parents: For God's Sake, Don't Borrow Money to Pay For Your Kids' College Education

Are you a parent who is thinking about taking out a loan to pay for your child's college education? Before you do, read Murphy v. Educational Credit Management Corporation, a recent federal court decision.

In 2002, Robert Murphy lived in Duxbury, Massachusetts and was the president of a corporation. Unfortunately, he lost his job after the corporation was sold and its operations were moved overseas. Although he had diligently looked for a new job, he was still unemployed in 2014.

Between 2001 and 2007 Murphy took out 12 loans to finance a college education for each of his three children. This is remarkable, since he was unemployed during most of this six-year period. Apparently, Murphy had no difficulty borrowing money for his children's education even though he was out of a job. By May 2014, when a federal court issued its appellate opinion on his bankruptcy case, Murphy owed more than $240,000 on these loans.

By this time, Murphy was 63 years old, unemployed for almost 12 years, and in dire financial circumstances. He owed $700,000 on a home that was only worth $500,000, and his home was going into foreclosure. Although Murphy had once owned an IRA worth about a quarter of million dollars, he had cashed it out  to cover expenses. The court did not report on Murphy's family income in 2014, but it noted that Murphy and his wife had only earned about $13,000 in both 2010 and 2011, money his wife had earned as a teacher's aide.

Pretty sad story, you might think.  Nevertheless, a federal court upheld a bankruptcy court's decision to deny Murphy's request to have his children's student loans discharged.  Although the court admitted that Murphy had no current ability to pay off the loans, it noted that Murphy was in good health and might still find a high-earning job that would allow him to pay off his enormous debt.

Ending its opinion on a remarkably callous note, the court observed that Murphy had struck a bargain with the government when he borrowed money to pay for his children's college education.  "All bargains contain risks," the court pointed out, and Murphy's bargain was especially risky since he had been unemployed during the time he took out most of the loans. 

In short, the court ruled, Murphy's situation did not present "truly exceptional circumstances" that would permit him to shed his student-loan debt.  Thus, the federal court agreed with the bankruptcy court's  decision to deny Murphy relief in bankruptcy for his children's student loans.

The Murphy decision serves as a warning to all parents who are thinking about borrowing money to help their children get a college education. Whether the parent takes out a federal student loan or borrows money from a private bank, a college loan cannot be discharged in bankruptcy unless the parent can show "undue hardship."

Mr. Murphy was unable to show undue hardship in spite of the fact that he had been unemployed for 12 years, had liquidated his retirement account and was in the process of losing his house in foreclosure.

According to a recent article in the Huffington Post, parents currently owe an accumulated $62 billion in Parent Plus Loans, which are guaranteed by the federal government. And this figure doesn't include loans parents took out with private banks that are not federally guaranteed.  A  2012 Huffington Post article reported that about one million Parent Plus loans were taken out during 2011, totally more than $10 billion in just that one year.

Parents who guarantee their children's college loans or who take out loans to pay for their children's education put their financial futures at grave risk.  Before borrowing to pay for your children to go to college, you should think about Mr. Murphy. Sixty-three years old, unemployed, and living on an income near the poverty level, Mr. Murphy is burdened by almost a quarter million dollars of student-loan debt.  That's a pretty scary story.

References

Murphy v. Educational Credit Management Corporation, 511 B.R. 1 (D. Mass. 2014).

Marian Wang,  Beckie Supiano, & Andrea Fuller. Parent Plus Loans: How the Government Is Saddling Parents With Loans They Can't Afford. Huffington Post, October 5, 2012. Available at: http://www.huffingtonpost.com/2012/10/05/parent-plus-loan-government-parents-student-debt_n_1942151.html

Marian Wang. As Parents Struggle to Repay College Loans for Their Children, Taxpayers Also Stand to Lose. Huffington Post, April 4, 2014.  Available at: http://www.huffingtonpost.com/2014/04/04/parent-plus-loans_n_5094931.html

The New American Serfs: Student-Loan Debtors in the Federal Income Contingent Repayment Plan

Slavery in the United States ended with the Civil War, but slavery in another form lived on.  Slavery was replaced by a new kind of bondage, whereby tenant farmers and share croppers basically became serfs to their landlords and were as bound to them as if they were still human chattel.  The age of the share cropper and the tenant farmer did not end until the Great Depression, when the rural poor fled the land and migrated to the cities or to California.

But those days are over, right? No one in the United States is a slave or an indentured servant in the 21^st century. 

Sadly, our national government has created a new form of bondage, which it imposes on college students who participated in the federal student loan program but can’t pay back their loans.  Some of these former students are burdened with student-loan obligations for decades--hounded by the loans they cannot repay and the accumulating interest on their debt. Some of them have become true indentured servants--bound to pay a portion of their income to their federal student-loan creditors for a majority of their working lives.

The Disturbing Case of In re Stevenson

If you think I have overstated my case, you should read In re Stevenson (2011), a recent decision by the U.S. Bankruptcy Court in Massachusetts. Janice Stevens took out two student loans in 1983 to obtain additional education beyond her bachelor’s degree. She took out a third loan in 1987 and another in 1992. By 2008, when she filed for bankruptcy, Ms. Stevenson was in her mid-50s, and her total indebtedness was approximately $112,000, including accrued interests and costs.

Ms. Stevens filed an adversary proceeding in bankruptcy court, seeking to have her student loans discharged on the grounds of undue hardship.  Most people would think she had a pretty good case. Although she had held good jobs over the years, she had suffered periods of joblessness and homelessness and had sometimes lived in homeless shelters. In addition, Ms. Stevenson had health issues--back problems, high blood pressure and an autoimmune disease that required her to take medicine.

During the bankruptcy proceedings, Ms. Stevenson held a part-time job at Walgreens, earning less than $500 a month. She supplemented her meager income with unemployment checks, which were scheduled to terminate in a matter of months.  She also received a monthly subsidy from the State of Massachusetts to help her pay her rent.

In spite of Ms. Stevenson’s bleak economic circumstances, Judge Joan Feeney ruled that her student loans were not dischargeable in bankruptcy. Judge Feeney concluded that Ms. Stevenson should continue paying her loans through the federal government’s Income Contingency Repayment Plan (ICRP), whereby she would pay a percentage of her income toward paying down her loans for a period of 25 years.  At the end of the 25 year period, any remaining balance would be forgiven.  

Did Judge Feeney Make Ms. Stevenson an Indentured Servant?

When she came into bankruptcy court, Ms. Stevens had unpaid student loans stretching back to 1983. Instead of discharging her debt based on undue hardship, Judge Feeney concluded that Ms. Stevenson should participate in a federal repayment program that would obligate her to pay a percentage of her income toward her debt for 25 years.

If Ms. Stevenson goes on the ICRP, she will be nearly 80 years old when her payment obligations cease.  By that time she will have been burdened with student-loan debt for well over half a century.

Solutions?

It seems to me that the Income Contingent Repayment Plan, which Judge Feeney endorsed for Janice Stevenson, is nothing more than a modern version of indentured servitude, whereby student-loan debtors like Ms. Stevenson pay a portion of her income to student-loan creditors for the balance of her working lives.

The federal student loan program is out of control, and the Income Contingency Repayment Plan is making life harder for overburdened student-loan debtors, not easier.

Congress needs to do two things. First, it should amend the bankruptcy laws to allow insolvent student-loan debtors to discharge their debts in bankruptcy just like any other overburdened debtor.

Second, Congress should pass legislation abolishing the ICRP option for stressed out student-loan debtors. People who are insolvent deserve the fresh start that bankruptcy is designed to give them. They don’t deserve to be saddled with a 25-year repayment plan that will cripple them financially for the rest of their working lives.

References

In re Stevenson, 463 B.R. 586 (Bkrtcy. D. Mass. 2011).