Written by Charleston Bankruptcy Lawyer, Russell A. DeMott
Student loans are, practically speaking, almost non-dischargeable in bankruptcy. The Bankruptcy Code and the law interpreting it says, in essence, that the debtor must be disabled and that he must prove he is–and will be–unable to repay the student loans. The fact that you paid a fortune for your education and got a crappy job (or no job), well, that’s your problem. And this applies to both government-backed loans as well as private student loans.
Student loan defaults are at record numbers. My friend, Atlanta Bankruptcy Lawyer Jonathan Ginsberg, did a post on this entitled, “Student Loan Debt May be a Bigger Problem than Credit Card Debt.” And it’s not just Jonathan Ginsberg who’s noticed. Time magazine has taken note on several occasions. See, for example, “Scariest Student Loan Debt Numbers,” reporting that over 100 billion dollars in student loans (that’s billion) will be taken out this year and the total amount of outstanding student loans is one trillion dollars (that’s trillion!).
I was dealing with a tax issue this week and BAM, it hit me
As I dealt with a client with a “tax mess” this week, the contrast in how we deal with income tax debt and student loan debt struck me as truly bizarre. Income tax debt–generally speaking–is dischargeable if the debt is more than three years old. (See Using Bankruptcy to Discharge Tax Debt for a more detailed discussion.) One of the more notable–and truly stupid–changes to student loan dischargeability law in the 2005 bankruptcy “reform” was to treat private student loans the same as government-backed loans. Now, thanks to Congress, a student be can defrauded by one of the many sham online “universities,” take out a bunch of private student loans, and be in just as much trouble as someone who got a real education. What a nice touch.
But this does help you go to school in your pajamas!
Education Connection says it all: Go to school in your pajamas! These ads (click here) are my favorites. (By that I mean the most likely to induce vomiting.) Click a few buttons and you, too, could make over a million dollars more!
I don’t really have a problem with the snake oil these schools try to sell. Buyer beware and all that. But what really irks me is that private student loan lenders get “most favored creditor” status just like the government-backed lenders. (With the government-backed loans the government subsidizes and guarantees the loans.)
The “bam” that hit me was the stark contrast in how the U.S. government has made it relatively easy to discharge tax debt (that’s debt owed to the government itself!) and so difficult to discharge debt to some company making private student loans for girls in their pajamas getting online degrees.
Stop the craziness!
Student loan dischargeability law is nutty enough when it comes to government-backed loans. But putting private student loans on this same level boarders on the insane. How can it be that private student loans are harder to discharge than taxes–debts owed directly to the U.S. Government?
Making unsecured debt difficult to discharge is bad public policy. It encourages predatory lending and the proliferation of Snake Oil Universities where gullible consumers are promised riches if they just get a college degree by studying in bed in their pajamas. It also drives up tuition. Universities–both the real ones and the pretenders–charge more because students have the ability to borrow more. People should be better consumers, sure, but to punish them by making their bad decisions burden them for the rest of their lives is too punitive and only encourages irresponsible lending. Sounds a bit like the toxic mortgage mess, doesn’t it? But actually, the growth of college tuition is a far bigger bubble, according to Moody’s Analytics.
There is no reason private student loans should be more difficult to discharge than debt owing Visa and MasterCard. And they most certainly should not be more difficult to discharge than income tax debt owed to the U.S. government.
Reform is badly needed in this area. Hopefully, Congress will decide to do some “nation building” here in the U.S. and start focusing on the needs of its constituents.
Postscript: For information on student loan dischargeability issues, see parts one, two, and three of my series at Bankruptcy Law Network entitled, “The Worse Kind of Debt You Can Have: Student Loans.” Only .04% of student loans are discharged in bankruptcy, according to a recent Time Magazine article.
It’s funny, reading your post about non discharability of student loans and how you point out that Title XI allows these bills to get out of control, just as medical bills can get out of control, since the hospitals can only charge as much as the insurance companies will allows. The difference is of course medical bills can be discharged as unsecured debt, while student loans can not.
Good point, Michael. Thanks for commenting.
You talk about trying to get the loans discharged due to bankruptcy which I can only imagine is a near impossible journey. But the Dept. of Education has a program for the disabled. I’ve been disabled since 2002. After being certified as 100% disabled by both Social Security and my employer, a law enforcement agency on the west coast, my attorney told me I qualified for “student loan discharge due to disability.” He sent me the forms. I filled them out and give the doctors portion to my doctor during my next visit. After gathering all the form i sent them to the address noted on the forms. A few months later I received a letter stating I failed to submit a copy of my previous two (three?) years tax returns. I was awfully certain I had included the requested items but I sent another set of copies, this time via certified mail. I didn’t hear anything for the next three years. Then suddenly and completely out of the blue I got call from a collections agency demanding I pay my delinquent student loans. Needless to say I was a little puzzled. I called and mailed off copies of the forms I’d sent in three years prior. That time I was told I never filed out a signed medical released form so my discharge was denied. Since I’d handed my doctor the form he needed to fill out and he insisted I complete the release form before he completed and signed the form I was again puzzled. For the next 4-5 years off and on I’d receive a notice that my loans failed to qualify for discharge due to this form being missing or that form not being signed. after a few more time I was no longer puzzled and realized the system is set up to never actually discharge anyone. In 2007 I completed yet another complete package which included forms from my doctor and a release so the Dept. of Ed could obtain a copy of my IRS tax fillings. Two months after submitting I called and spoke to a lady asking if all the forms had been submitted and everything was in order. She told me “everything looks like it here, you should be fine.” Three months later I received a letter stating I never submitted a “statement of earnings.” I called and in a very polite way asked “WTF!?! seriously what do I have to do to get your agency to admit I’ve submitted all the forms for this discharge?” he lady i spoke to that day refused to give me her name but told me that basically she’s never actually seen anyone obtain a discharge. I asked what i needed to do to meet the earnings statement and she told me what to submit and where to send. So I sent it out ASAP RR Cert. US Mail. I never heard anything about it again until Sept. 2012 and yet one more time I got a notice of being in default on my student loans. In that package was a form to request a hearing either on the phone or in person. I completed that form and sent it in. Never heard a word back. This morning I received an e-mail from the company I used to file my federal tax returns say congratulations your returns have been accepted and approved however due to a federal debt your entire refund ($4006) is being sent to the, you guessed it, the Dept. of Education.
These people have lied to me repeatedly, claimed I never submitted forms I clearly did. They never notify you when your loan discharge is denied. Often you find out about it when you apply for credit or refi your home as they keep reporting you to the credit reporting agencies as in default regardless of whether you’ve completed the discharge process.
You can enter the process of attempting to have your loans discharged due to a physical disability I can almost certainly assure you before you get any where near having them actually discharged you’ll also be suffering from an unstable mental condition as well.
Had I simply kept paying them, had that attorney never told me about the discharge program I’d have pay off my loans 4 years ago. As it is now my credit rating has been hurt greatly, money I was counting on from the IRS has basically been stolen from me and mentally I’m just completely worn out.
This is not a loan discharge program. It’s some kind of sick and twisted way to mess with disabled people. How the people who work there sleep at night is beyond me.