Is Bankruptcy Really an Option for Some Student Loan Borrowers?
- January 20, 2017
- Posted by: Jeff Gitlen
- Category: Student Loans
A handful of interesting court cases in 2016 have made bankruptcy a more reasonable option for about 10% of student loan borrowers. Federal student loans have been historically difficult to discharge in bankruptcy except when borrowers can prove that they are in “extreme financial hardship.” On top of this, the chances for discharge on a private student loan are even lower. In short, all student loans are fairly difficult to discharge.
In most cases of bankruptcy, borrowers cannot discharge their student loan debt, but they can sometimes include a student loan account during the bankruptcy process. Although it has always been difficult to include student loan debts in bankruptcy, it’s never been impossible. It’s only been a matter of proving that the borrower is experiencing an undue hardship. Essentially, if a borrower can’t have a minimum standard of living if they have to pay the student loan, and if that circumstance seems likely to continue indefinitely, then student loan debt can be filed in bankruptcy.
One example of an economic undue hardship might be a 55 year old retail worker getting paid minimum wage. A similar court case ruled that since the borrower did not have the skills or ability to pursue higher paying work, he had maxed out his earning potential and would be burdened by his student loan debt.
An example where the court ruled the opposite would be in the case of a pastor working at a start up church on a small budget. In that case, the court decided that the pastor could seek work with an organization where he was able to make a higher level of income and did not allow him to include his student loans for undue hardship.
In 2016, a handful of bankruptcy cases have ignored the “undue hardship” requirement and focused instead on a phrase within the legal definition of what a student loan is.
The legal definition of a student loan is essentially a loan used for “educational purchases,” and that wording has been just vague enough for several types of students loans to push through into bankruptcy proceedings. If you can argue that your loans were not used for educational purposes, you may be able to include them in your bankruptcy.
It may seem like an impossible task, but several borrowers have recently been successful by arguing that the loans they used to take examinations like the bar exam or to attend a non-accredited university were not borrowed for educational purposes.
In March, Leslie Campbell won a bankruptcy case in New York where she argued that the loan she took out to study for the bar exam should be included in her proceedings. The judge ultimately ruled that Campbell, who failed the bar exam, should not have to pay the unpaid portion of $15,000 that she borrowed for that purpose.
An American women studied medicine at a college in Africa, only to discover upon returning to the US that the school was not accredited and she was not eligible to sit the medical board exams. In her Rhode Island case, the judge decided that loans to attend a non-accredited school were not the same type of loans that are used for educational purposes.
There have been other cases that have further pushed the boundary, but more importantly the rulings open the door for more and more people to argue that their specific circumstances warrant discharging the debts in bankruptcy. These most recent examples come at a time where the student loan debt is under scrutiny and debate, which makes it likely that people seeking student loan bankruptcy are finding a sympathetic court.
It’s no surprise that more and more borrowers are seeking creative ways to discharge their loans through bankruptcy. As the total amount of student loan debt increases, we will likely see even more court cases that push the boundaries of what is acceptable in bankruptcy and student loan rules.
Any change in our government can affect our economy, and certainly changes on the level that we are seeing this month will make a lot of the moving pieces start rolling. Student loan debt is staggering, and getting bigger every year. If our students have a robust economy and a roaring job market waiting for them when they exit school, we can begin the real work of changing the cost of higher education. Only time will tell how our economy will react to our new administration.