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

Occupy Wall Street Needs a Clear Objective: How About Bankruptcy Relief for Overburdened Student-Loan Debtors?

You can fool all of the people some of the time, Lincoln observed, and some of the people all of the time. “[B]ut you can’t fool all of the people all of the time.” The Occupy Wall Street protestors--huddled in tents and shanties in cities across America--are some of the folks who are not fooled about economic conditions in the United States. Conservative pundits revile the Occupy Wall Street protestors as communists, anarchists, and criminals; and counter-protestors hold up der isive signs that read, “Get a Job!”

But of course that is the point. Many of the protestors are unemployed or severely underemployed. If these people had good jobs they wouldn’t be camping in urban parks or subjecting themselves to police beatings and arrest. No--the Occupy Wall Street protestors are not wild-eyed radicals. Most are simply angry Americans demanding economic justice. (Lacey, 2011).

Unfortunately, the Occupy Wall Street movement cannot achieve its goals for economic justice without defining some clear objectives--which so far it has not done. It is not enough to say Congress should tax the rich or regulate the financial sector better. Occupy Wall Street needs to boil down its broad demand for economic justice to articulate some clear and realistic political goals.

Student Loan Default Rates Are Catastrophic

Let me suggest one plank for OWS’s economic justice platform--bankruptcy relief for overburdened student-loan debtors. Although the U.S. Department of Education won’t admit it, default rates on student loans are catastrophic--especially for students who borrowed money to attend for-profit colleges and vocational programs.

Even by DOE’s own anemic standard for measuring default rates, those rates have doubled over the past few years (Blumenstyk, 2011). And DOE’s rating system only measures defaults in the first two years of the student-loan repayment period. When the measurement period is expanded to three years--which DOE will soon do--the default rate will spikes dramatically--particularly for students who borrowed to attend for-profit institutions.

 And even these numbers don’t tell the full story. Students who qualify for economic hardship deferments are not making their loan payments, but they are not counted as defaulters. Some for-profit institutions have encouraged their students to apply for economic hardship deferments in order to keep their institutions’ official student-loan default rates down. Unfortunately, for most of the people who have economic hardship deferments, the interest on their loans continues to accrue (In re Halverson, 2009). If student-loan debtors defer their payments for just two or three years, they will see the outstanding balance on their loans grow significantly--perhaps to an amount so high that they will never be able to pay back their loans.

Some experts estimate that the student-loan default rate for students who attended two-year for-profit institutions is 40 percent (Field, 2010); and another analysis concluded that a majority of students who borrowed money to attend for-profit institutions are in default (Lewin, 2010). And of course a student-loan default subjects the defaulter to a torrent of bad consequences. Their credit is ruined; they become subject to all the wiles and torments of debt collectors; they can have their income-tax refunds garnished; they can even have their Social Security checks dunned (Fossey & Cloud, 2011; Cloud, 2006). In short, as a recent New York Times editorial put it, defaulting student-loan debtors wind up in “financial purgatory” (Editorial, 2011, p. A34).  

Conclusion?  OWS Should Demand Bankruptcy Relief for Student-Loan Debtors

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