Student loan debt is notoriously difficult to get discharged in bankruptcy. But there’s potentially good news for student debtholders: some bankruptcy judges have reportedly been showing leniency toward canceling debt.
The judges in question haven’t totally canceled student loan debt but some are softening as they encourage lawyers to work pro bono to help debtholders; other judges are attempting to lower repayment amounts, according to a recent Wall Street Journal article. The article’s findings come from interviews of 50-plus bankruptcy judges, some currently practicing, some not.
Other signs of leniency include judges showing greater sympathy toward debt while lenders have become more open to conducting settlements. Whether it’s their own children or their law clerks, judges see the effect large amounts of education debt can have on these debtholders.
Vanderbilt law professor Terry Maroney, who studies judicial decision-making, said via the WSJ, that discouraged judges are more likely to “look for wiggle room and try to find solutions that will allow them to sleep at night.”
With judges beginning to sing a different tune toward student debt, it’s timely. To put debt into perspective, a typical law student carries $119,000 in loans, according to the WSJ. A bigger picture shows that almost 45 million people in the U.S. hold student debt with the total amount more than doubling in the last 10 years to $1.5 trillion. The federal government backs most of this debt, which has leaped past credit card debt as the second biggest consumer debt, following mortgages.
Courts and Student Debt
As for handling student debt in bankruptcy courts, the rules governing it are created by lawmakers and judges issuing important rulings. According to the WSJ, numerous recent Congressional bills that could have removed student loan debt through bankruptcy have been delayed. This postponement is two-fold as rethinking the legal standard for student-loan debt is bipartisan and the burden of proof on borrowers to show repaying the debt needs to exemplify an “undue hardship.”
Furthermore, borrowers rarely try to get their student loans canceled in bankruptcy court as their chances of winning are pretty small and proving undue hardship is challenging. In a 2017 WSJ analysis, for the millions repaying their student loans, only 473 used bankruptcy to get relief while a review using the Westlaw database disclosed that judges issued rulings on student loan debt only 16 times in 2017; the canceling of debt occurred in three cases and a grant of partial relief transpired for one case.
But it’s not all doom and gloom. Some of the country’s bankruptcy judges are starting to argue that the current legal standard is inadvertently punitive and wasn’t intended for adults still paying their student-loan debt so many years after college.
And recently, some debtholders are taking cases to court and winning, WSJ reported. In 2015, an Alabama judge erased $112,000 in student debt for a single mother and high school teacher while in 2017; Boston U.S. Bankruptcy Judge negated $50,000 of student loan debt, citing the debtholder’s inability to work because of health problems.
When bankruptcy isn’t an option for a borrower who’s struggling with student loan debt, there are other paths to take. Federal student loans and some private loans offer forbearance and deferment for hardship. Federal loans offer income-based repayment plans, which can lower one’s monthly payments.
Once a borrower has trouble repaying their loans, it’s important for them to reach out to their loan servicer to see what options are available to them.
Author: Debbie Baratz
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