The Wall Street Journal published two blogs today which debated the merits of amending the bankruptcy code to discharge student loan debt.
One of the blogs called for reform of the cost of higher education rather than addressing dischargeability under the bankruptcy code. While the article was well intentioned, it failed to hit on the point that there are 40 million individuals with outstanding student loans who would not have their student loans reduced if college tuition decreased.
The other blog did make note of the need to provide relief to student loan debts under the bankruptcy code.
Student loans are currently non-dischargeable under the bankruptcy code unless the debtor can show a hardship, which is very difficult and rare.
Part of the issue with showing the hardship, is the debtor must bring an adversary proceeding attached to the bankruptcy – a separate litigation action. Anyone familiar with litigation can tell you that bankruptcy attorneys will expend a great deal of time on the litigation, which in turn creates a financial burden on the client.
In addition to the high cost, bankruptcy adversary proceedings are not guaranteed to go in the debtor’s favor, so they could be out attorney fees and still owe the student loans.
We recommend consulting with your bankruptcy attorney to advise in a more detailed manner. The adversary proceeding can be three months after your bankruptcy case is filed, so debtors will have plenty of time to decide how to proceed.
Should the bankruptcy code be amended to make it easier for borrowers to seek forgiveness of student loan debt through a bankruptcy filing?
The explosive growth of student debt has become not only a mounting political issue, but its near-suffocating effect on millions of Americans also is causing considerable macroeconomic impacts.
The statistics are daunting: Total student debt now exceeds $1.2 trillion, up from only $240 billion just 12 years ago. During this period, the number of borrowers has increased more than 65% to nearly 40 million, with average student loans increasing nearly 50%. And as graduate school ranks increased during the most recent financial downturn, average student debt for these former students is now approaching $100,000.
There are many causes for these dramatic increases. Tuition is increasing at far greater than the rate of inflation, and enrollment at “for-profit” colleges, which are highly dependent on “risky” student loans, is exploding. It’s no wonder that the default rate on student loans is the highest of any debt category, approaching close to 20%.
While a college education unquestionably enhances future earning power, the price of this economic mobility is dramatically affecting ultimate financial independence. Savings rates are at all-time lows, job choices are increasingly based on debt service and 75% of student borrowers have the deferred home purchases due to their debt load.
Although a number of discussions are occurring in Washington and elsewhere to help alleviate the burden of student debt, one option that remains off the table for these millions of borrowers is access to the bankruptcy courts. Of course, prior to 1976, student debt was fully dischargeable in bankruptcy. Relying on ill-founded concerns that a floodgate of bankruptcy filings would deplete federal lending, by 2005, student loans were for all intents and purposes not dischargeable in bankruptcy.
There are a number of reasons why the bankruptcy code should be changed to permit student loans to be discharged. First, the legislative rationale underlying the elimination of dischargeability is no longer persuasive. Second, permitting student-loan borrowers, like borrowers under any other loan, to have access to the bankruptcy courts can serve the long-standing federal policy of allowing debtors the breathing room necessary to restructure their affairs. The policy is no less persuasive with student debt, which has a much more devastating impact on less economically advantaged households—60% of the student debt is held by households with less than $8,500 in net worth. It’s inexcusable to deprive these consumers with the same access to the bankruptcy courts as other consumers.
The Wall Street Journal: http://blogs.wsj.com/bankruptcy/2015/05/13/the-examiners-helping-over-burdened-borrowers-is-the-goal-of-bankruptcy/
