More and more students are shaking off notoriously hard-to-get-rid-of student loan debt with help from creative bankruptcy lawyers across the country.
Educational debt has become a leading problem among bankruptcy filers. In 2013, 22.3% of bankruptcy filers had student loans with an average balance of $32,096, up from about 15.7% with an average balance of $15,350, according to a 2014 paper in the Suffolk Law Review.
Amid fears that people were skirting their debt responsibilities, Congress in the late 1970s started exempting federal student loans from being discharged in bankruptcy. Now it is hard to get discharge for a student loan except in extreme circumstances where the debt was forcing “undue hardship” on the borrower. In 2005, Congress tightened those rules to virtually prevent any student debt to be discharged under bankruptcy.
Four categories of student debt - a federal loan, a loan that’s part or fully from a nonprofit institution like a school, a private loan used for qualified education purposes (namely, the cost of attendance to an eligible institution), or a loan for an “educational benefit” -- cannot be discharged without proof of “undue hardship.” Judges have excluded such things as prolonged unemployment, alcoholism, and criminal records from qualifying as undue hardship.
Since undue hardship is so difficult to prove, lawyers have been looking at new ways to help people offload or manage their educational debt. This is especially prevalent in the case of private student loans.
Lawyers discovered that courts have been favorable on discharging loans if they were made to students who attended non-accredited programs or were loaned for more than the cost of attendance.
Another tactic that has worked is asking private lenders to prove they legally cannot collect the debt. Since student loans are often packaged, sold, and resold many times, lenders have difficulty proving they are owed the payments.
“If the lender can’t prove they own the debt, then it makes it much more difficult for them to collect on it,” said Richard Gaudreau, a New Hampshire-based bankruptcy attorney.
Even if the debt cannot be discharged, some attorneys will try to get a federal student loan classified separately in a bankruptcy proceeding so clients can at least use the government’s special payment plans to manage the debt.
The trend of getting student loans off people’s books is so large and growing that CINgroup, which makes software to help lawyers prepare bankruptcy papers, plans to launch software that scans a client’s student debt to see if any of it may be eligible for discharge. The software also helps with preparing filings to challenge it.
CINgroup estimates that of the 750,000 consumer bankruptcies filed each year, there could be up to 50,000 cases of potentially dischargeable student debt.
Image Copyright Southern Arkansas University