Wednesday, September 30, 2015

Some Good News About The Bankruptcy Option For Student Loan Debt

George Leef at the John Williams Pope Center for Higher Education Policy writes perhaps the most encouraging thing I've read in ages on the subject of student loan debt in a great long while. As it turns out, and contrary to my prior writing on the subject, student debt can be discharged through bankruptcy, but it requires going through special hoops to do it:
Writing on Huffington Post, Steve Rhode (who calls himself the “get out of debt guy”) states, “The general perception is that federal student loans are not dischargeable in bankruptcy. Obviously that assumption is not true because an allowance exists for discharge in the case of undue hardship. But many incorrectly assume that threshold is impossible or nearly impossible to accomplish.”

Rhode finds the support for his conclusion in his analysis of 35 adversary proceedings in 2012 where the debtor sought discharge of student loans through bankruptcy. In those cases, the debtor won full discharge in 47 percent and received some reduction or more favorably repayment terms in another 33 percent.

Those 2012 numbers are in the same vicinity as the numbers calculated by Professor Jason Iuliano from cases filed in 2007, which formed the basis for his 2011 paper published in American Bankruptcy Journal, An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard. Iuliano found that 25 percent of the cases resulted in full discharge and 26 percent resulted in partial reduction or easier payments.
It turns out further than representing oneself in bankruptcy court is entirely plausible, as Acosta Conniff v. Educational Credit Management Corporation showed in Alabama. Further, "the Department of Education recently released a “guidance letter” pertaining to undue hardship discharge cases" that "tilts the scales more in favor of students who are petitioning for bankruptcy discharge." Leef even advocates reverting student loan debt to normal status, i.e. where bankruptcy law was prior to 1977, which would allow easier discharge of unpayable debt and force universities and banks to rationalize degree programs. It's probably too much to hope for legislative change at this point, but that's what we need.

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