Tag: Student Loans

The Student Loan Crisis and Bankruptcy

in Bankruptcy

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.  

Is Student Loan Debt Dischargable in Bankruptcy

in Bankruptcy

Student loan debt has been labeled a crisis in the United States.  The total outstanding amount of student loans in America currently stands at just over 1.5 Trillion dollars.  That’s more than is owed even to credit card companies. Needless to say, thousands of Americans are struggling with student loan debt each and every day.  They are putting off buying houses, getting married and starting families. The payments and the weight of those payments are keeping people from being entrepreneurial and taking risks. Student Loans are a yoke around the neck of American productivity and frankly, it’s causing our society a lot of trouble.

For people who find themselves unable to pay all their bills, Bankruptcy is a great way to get back on the road to financial prosperity.  Many people often come to our office asking if student loans can be discharged in their bankruptcy, as that alone is a significant contributing factor into why they can’t make ends meet.  Unfortunately, the answer to the question, are my student loans dischargeable, is often no. Student loans are nearly impossible to discharge, especially in this part of the country. In other parts of the country, appeals courts have allowed discharge in certain circumstances that are very limited and still allows only a select few to actually qualify for discharge and then it’s usually only a partial discharge. There are very few times that student loans are dischargeable and only if certain criteria are met.

In order for your loans to be discharged you must prove what the court calls and Undue Hardship.  What actually qualifies as an undue hardship is usually up to the court of appeals that is deciding your case.  In order to qualify for an undue hardship you must pass what is known as the Brunner Test. The test is composed of 3 basic things:

  1. The debtor is unable to maintain a minimum standard of living for themselves and their dependents with their current level of income and expenses.
  2. Their current financial situation appears that it will continue throughout the course of the repayment plan and finally
  3. The debtor has made a good faith effort to repay all the loans that they took out.

IF the court determines that you meet these criteria then they would cancel part or all of your outstanding student loan debt.  I will be very honest. In the decades our office has been operating we have only had 1 client actually have their student loans discharged and that client was going through a terminal disease.  Sadly, it probably isn’t going to happen. There are, however, other options available.

Filing a Chapter 13 or Chapter 7 bankruptcy can allow you to discharge many of your other debts, including medical debts and credit card debts that are taking up valuable disposable income. That income, if freed up, could allow you to get your student loans paid back very quickly and allow you to get that burden off your back for good.

If you are feeling overwhelmed by debt, including student loans, come see the experienced and friendly attorneys at Harmon and Gorove.  They have decades of experience in handling bankruptcy cases of all kinds and they can help you decide which path is best for you during our free, no obligation consultation.  Contact us today to see how we can help you become debt free.