When it comes to the issue of wiping out student loans in bankruptcy, most lawyers act like a kid who gets his lunch money taken each day by the school bully.
Whenever someone calls a bankruptcy lawyer and mentions student loans, the response they usually get is a long sigh followed by, “we can’t really do anything about those. Sorry, but bankruptcy won’t help with your student loan problems.”
That’s wrong, but most lawyers have been conditioned by years of intimidation and hopelessness. Unfortunately, borrowers don’t know that.
The borrower accepts this statement at face value, and continues to be the victim of a student loan system gone wild.
The Deception Of Student Loans In Bankruptcy
Student loan debt is difficult to wipe out in bankruptcy. People need to prove what’s called, “undue hardship.”
To the person mired in student loan debt that term means, “I can’t pay the student loan debt.”
But as they say, that word doesn’t mean what you think it means. And that’s precisely why bankruptcy lawyers often run as fast as they can in the other direction when confronted with a student loan problem.
The basis for determining undue hardship comes from The Brunner Test, named after a court case in New York. Under The Brunner Test, a student loan is dischargeable only if:
- The debtor cannot, based on current income and expenses, maintain a “minimal” standard of living for himself or his dependents if forced to repay the loans;
- additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
- the debtor has made good faith efforts to repay the loans.
To prove undue hardship, you’ve got to show that you’ve done your best but your financial situation doesn’t allow you to repay the student loans and keep a minimal standard of living for yourself and those who rely on you. Beyond that, you’ve got to prove that you’re unlikely to see a marked increase in your household income at any time in the future.
Bankruptcy Lawyers Buying The Fear
That sounds fairly straightforward, but each of those factors are up to the bankruptcy court’s judgment.
What, for example, constitutes a “minimal” standard of living? What sorts of additional circumstances could exist, and how long do they need to persist in order to qualify as a “significant portion of the repayment period”?
In other words, the world of student loans is uncertain when it comes to bankruptcy. And that, dear friend, is what scares bankruptcy lawyers.
After all, the industry has been trained to take on Chapter 7 cases at flat fees, often working at an effective hourly rate far lower than what the public may think (for example, on a recent Chapter 7 bankruptcy case I ended up with a profit of somewhere in the range of the minimum wage). Lawyers sit in front of clients and break down, on a debt-by-debt basis, exactly what will be wiped out and what will not.
Chapter 13 cases, most consumer bankruptcy opt for the flat fee approach as well. In many part of the country, those lawyers who choose to accept a flat fee for Chapter 13 bankruptcy cases have those fees dictated by the court system, which mandates the maximum amount of money a lawyer can charge for representation.
Though a few attorneys choose to bill by the hour, that’s the exception to the rule precisely because of the uncertainty it creates. The client can’t be sure of the amount of money they will ultimately need to spend, and the lawyer is uncertain as to whether the fees will be approved by the bankruptcy court.
When confronted by a student loan issue, bankruptcy lawyers see a wall of uncertainty. There’s no way to assess whether the debt will be found to be dischargeable, and the argument can be won or lost on the whims of the bankruptcy court judge.
The bankruptcy lawyer often doesn’t get a client to commit to taking the risk because the attorney doesn’t present the risk as a winnable one under any circumstances.
The Fear Feeds The Problem
The result is that the public believes that student loans can never be discharged in bankruptcy. Judges are never confronted with the issue, and so are never forced to become educated about the world in which borrowers live. They don’t see the misery of the parents saddled with student loans they took out for their children, students who spent $100,000 on a for-profit school that handed them a worthless piece of paper, and the infirm who face physical or emotional challenges prohibiting them from ever being able to afford student loan repayment in the future.
A showing of tight finances isn’t enough to discharge your student loans. That said, most bankruptcy courts require more than temporary financial adversity but typically stop short of utter hopelessness. You’ve got to take into account all of the facts and circumstances surrounding someone’s situation, present the best possible argument, and do your job of attempting to convince the judge that your position is the correct one.
The Problem Won’t Go Away Anytime Soon
Will Congress act to make student loans dischargeable in bankruptcy? Personally, I’d be shocked if that were to happen anytime soon. For all the chain-rattling and bad press, private student loan lenders are making a ton of money off their practices and will likely spend a lot of money to lobby Congress to see things their way.
Federal student loans provide so many repayment options that the government can simply expand them to avoid going back to the drawing board of rewriting the bankruptcy laws yet again.
Sure, something may happen eventually. But we’re living in the now, not in the tomorrow.
What The Bankruptcy Lawyers Need To Do
The bankruptcy bar needs to either begin bringing student loan discharge actions or start calling in student loan lawyers who are well-versed in bankruptcy law to help carry the water.
Analyze the situation, assess the risks, and explain those risks to people who are in trouble over their student loans.
Don’t pull punches, but don’t paint a picture of doom and gloom.
Learn the ropes of student loan law, or associate with a lawyer who handles these issues on a regular basis.
What Student Loan Borrowers Need To Do
If you owe money for student loans, take the time to find an attorney who’s willing to talk about the realities of bankruptcy with you.
That includes the possibility of a full or partial discharge of your student loans (yes, it’s possible to wipe out only part of your student loan debt in the context of a bankruptcy case), as well as your non-bankruptcy options.
Be prepared to explain your financial life, as well as your mental and physical situation, with your lawyer. Outline the whole situation, and be absolutely candid.
Understand that there’s uncertainty when it comes to wiping out student loans in bankruptcy. You may not win if you bring the action in court, but one thing’s for sure – you will definitely lose if you won’t give it a try.
As we’ve seen all too clearly, our collective avoidance of a fight has gotten us nowhere good.