The United States is unique in the world in the way we handle bankruptcies. We go to great lengths to keep both borrowers and lenders honest. One of the flaws in our bankruptcy system is that bankruptcy can only discharge student loan debt in very extreme situations. Generally speaking, if a lender knows that they have someone on the hook, they’ll often use that leverage to lend too much money, often at varying levels of interest. This can cause problems in people’s finances because they often see easy, cheap money and get themselves overleveraged. This is one of the reasons our student loan crisis has occurred.
The reason bankruptcy is a good way to sort out the student loan debt crisis is that bankruptcy is a good way to determine those who can pay and those who can’t. Our bankruptcy system has been functioning in its current state for more than a century and knows how to make sure that lenders and borrowers are treated fairly. Bankruptcy is one of the most transparent systems in our entire legal process. Cases are open, transparent and decided quickly, allowing both the debtor and the creditor access to a fair and swift process.
The bankruptcy code already does a good job of determining who and can’t afford to pay something back and it certainly has a better grasp on the needs of the community than our elected leaders in congress.
BANKRUPTCY KEEPS BORROWERS HONEST
Bankruptcy will always keep a borrower honest. The hallmark of bankruptcy protection is truth. If you seek the protection of the courts, you must tell the truth, the whole truth and nothing but the truth about your financial situation. You must disclose ALL your income, assets and liabilities. The court’s job is to ensure fairness. You will always be left with enough to live a normal middle class existence in bankruptcy. The trustee and the courts all but guarantee it. If you can afford it you can keep your car, home, household goods and even your retirement accounts. What you can’t keep are luxuries like vacation homes, extravagant jewelry or collector cars.
If a borrower makes more money than the typical household in their area, that borrower must file a Chapter 13 and pay back at least a portion, if not all of their debts. If they make less than the median income, they have a choice between a Chapter 7 or a Chapter 13 bankruptcy.
BANKRUPTCY KEEPS LENDERS HONEST
This is harder for some people to understand, but indulge me. Lenders are in the business to make money. After all, that’s why you pay interest in a loan. If there is a chance that a lender won’t get paid back, that lender is less likely to throw money around like a drunk sailor. If lenders know that they COULD lose their investment, lenders could ultimately be more selective about what loans they fund and the amounts that they’re willing to shell out.
If student loans are more selective and offer less money, schools will have to lower tuition to meet the market. Schools that don’t will dry up and die. One of the reasons that college tuition has risen so sharply is the easy access to student loan money that has created a feeding frenzy amongst colleges looking to outdo one another and compete for your ever fatter loan check. Tuition has outpaced inflation for decades and where that money ultimately goes is lost on me. I have however seen extravagant marketing and insane amounts of construction on college campuses. It leads me to believe that there are ways to control costs at schools and if the money isn’t there to fill the coffers of colleges and universities they’ll be forced to cut back.
Let’s be very honest. I love my alma mater, The University of Georgia, and I want it to succeed but if students weren’t able to get their hands on so much money to begin with, tuition would cost less. Yes, some stadiums and arenas may not get built or renovated and perhaps the cafeterias would have to cut back on the gourmet meals, but students would still get a good education. After all, doesn’t a Toyota get you to the same destination as a Lexus does, just for less money?
THE SOLUTION
If student loans were dischargeable in bankruptcy, lenders would only approve students who were going to schools that provided them good, sound education that would provide them with the opportunity to earn a solid living. As someone who has practiced bankruptcy law for over a decade and filed thousands of cases, I often meet with people who owe tens of thousands of dollars in student loans that were taken out to attend a for profit college that didn’t lead them to any kind of gainful employment or employment advancement.
Prior to the 1990s, student loans were dischargeable in bankruptcy if a borrower had made 5 years worth of payments and met the qualifications. I believe we need to find a common sense solution to the student loan crisis. Americans want to pay for their education and many of them do. Having a way for those who can’t to eliminate their debts, legally, just makes good sense.