Who holds the record for accumulating the most debt while going to college and law school? I don't know, but it might be Scott Dufrane.
Mr. Dufrane attended Thomas Jefferson Law School and graduated from the Maurice A. Deane School of Law at Hofstra University in 2009. He financed his undergraduate and legal education with student loans, and by the time he received his law degree, he had incurred debt of nearly a million dollars--or more specifically, $900,000.
Dufrane filed for bankruptcy in 2015. At that time he owed the U.S. Department of Education approximately $400,000; and he owed various private creditors about $500,000.
A short time after filing his bankruptcy petition, Dufrane filed an adversary complaint in an effort to discharge his private loans. In his complaint, he argued that the private loans fell outside the protection of the "undue hardship" rule and were dischargeable.
Dufrane owed SunTrust Bank about $90,000, and SunTrust moved to dismiss Dufrane's adversary complaint on the grounds that the SunTrust loans were protected by 11 U.S.C. sec. 523(a)(8) and could not be discharged unless Dufrane met the "undue hardship" standard.
But Dufrane had an answer to SunTrust's argument.
He argued that the private loans were not "qualified student loans" under 11 U.S.C. sec. 528(a) (8) and could be discharged like any other nonsecured debt. Dufrane said that the private lenders had solicited him to borrow money while he was in school without any inquiry "regarding need, cost of tuition, or cost of any other education-related expense." In addition, the private lenders' solicitations "generally stated that the money could be used for anything, and that it would be disbursed directly to [Dufrane]" and not through any school.
Moreover, Dufrane alleged, all the private loan money was disbursed directly to him "without any input, knowledge or approval of the Financial Aid Office . . ."
Judge Peter Carroll, a California bankruptcy judge, agreed with Dufrane and ruled that the private loans were not the type of loan that Congress intended to exclude from bankruptcy relief. Judge Carroll acknowledged that federal courts were divided on this issue, but he agreed with courts that interpreted the law in harmony with Dufrane's position. Therefore, the judge denied SunTrust's motion to dismiss. Under the rationale of Judge Carroll's ruling, it seems possible that all $500,000 of Carroll's private loan debt will ultimately discharged.
What is the significance of the Dufrane decision?
First, as Judge Carroll pointed out, the federal courts are in disagreement about whether some private student loans are subject to the "undue hardship" rule, and this controversy may ultimately go to the Supreme Court. For now, however, student borrowers who responded to bank solicitations by taking out private loans and who received the money directly have an argument that those loans are dischargeable in bankruptcy like any other consumer loan.
Second, the Dufrane case illustrates the recklessness of student-loan creditors--both the federal government and private banks. It was insane for the Department of Education to loan Dufrane $400,000 for college and lawschool studies. And of course it was insane for private lenders to loan Dufrane $500,000 while he was in law school.
Almost no one who accumulates nearly a million dollars in debt to get a college degree and a law degree will ever be able to pay back that amount of money. Hofstra's law school is ranked 118 on the list of best law schools published by U.S. News & World Report. But even if Hofstra had graduated from Yale Law School at the top of his class, it is unlikely he would have obtained a job that would allow him to pay back $900,000.
Millions of Americans are struggling with student-loan debt. Last year, student borrowers were defaulting at an average rate of 3,000 a day.
The Department of Education is urging borrowers to enroll in income driven repayment plans (IDRs), but the Government Accountability Office reported last December that about half of a sample of people who signed up for IDRs failed to recertify their income as the program requires (p. 36). It seems obvious that IDRs are no magic bullet for the student-loan crisis.
Bankruptcy relief is the only viable option for people whose student loans are out of control. Last month, Congressmen John Delaney (D-Maryland) and John Katko (R-New York) filed a bill to make student-loan debt dischargeable in bankruptcy like any other nonsecured loan. This bill is unlikely to become law in this Congressional session; but someday, Congress will be forced by reality to pass some form of the Delaney-Katko bill.
Dufrane v. Navient Solutions, Inc. (In re Dufrane), 566 B.R. 28 (Bankr. C.D. Cal. 2017).
Representative John Delaney press release. Delaney and Katko File Legislation to Help Americans Struggling with Student Loan Debt, May 5, 2017.
Representative John Katko press release. Reps. Katko and Delaney File Legislation to Help Americans Struggling with Student Loan Debt. May 8, 2017.
The Wrong Move on Student Loans. New York Times, April 6, 2017.
US. Government Accounting Office. Federal Student Loans: Education Needs to Improve Its Income-Driven Repayment Plan Budget Estimates. Washington, DC: U.S. Government Accountability Office, November, 2016.