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Student Loan Debt No More?

Posted on July 29, 2019 in

It’s election season again. While it sometimes seems to never not be election season, here we are, and this cycle’s talking points are making themselves known. Immigration reform, healthcare, and foreign economic policy are on the list, as they have been in previous election cycles.  

But one of the more recent additions is what to do with the growing problem of student loan debt saddling our county’s younger generation. Some politicians, like Senator Elizabeth Warren, have called for an amnesty-like cancellation of student loan debt up to a certain amount. Others, like Senator Dick Durbin, suggest that our nation’s bankruptcy laws should be updated to help alleviate what will soon be a $2 trillion crisis. In fact, just last month, Senator Durbin proposed the Student Borrower Bankruptcy Relief Act, which would remove the special treatment educational debt receives under the Bankruptcy Code.

Under current law, student loan debt is virtually impossible to discharge in a bankruptcy. It requires the filing of a separate lawsuit within the bankruptcy proceeding, and an almost impossible showing by a debtor that repayment of the loan would constitute an “undue hardship.” 

Unless the debtor can demonstrate something along the lines of permanent disability, making repayment of her student loans virtually impossible both now and in the future, student loan debt will survive a bankruptcy filing. And that doesn’t even take into account the high cost to a debtor to attempt to make the required showing, which deters many from even trying. 

But why is educational debt given special protection in the first place, such that discharging it is next to impossible? For this, it’s helpful to consider some other common types of debt that a bankruptcy filing will eliminate without any special hurdles on the debtor’s part.

A great starting point is credit card debt. Over the course of my practice, I’ve seen debtors with scheduled credit card debt far in excess of $100,000. Generally, the credit cards were used to pay for ordinary living expenses like food, gas, and clothing, although it’s not uncommon to also see charges for flights, cruises, gym memberships, and expensive nights out in South Beach. Barring rare circumstances where it appears a debtor is abusing the bankruptcy system by seeking to fund a luxurious life without having to repay the credit card company that made it possible, a debtor who has voluntarily amassed an exorbitant amount of credit card debt will exit bankruptcy with a clean slate, no questions asked.

Like credit card debt, medical debt is also a common cause for a bankruptcy filing. And similarly, a debtor who falls into poor health and is straddled with thousands—if not hundreds of thousands—of medical debt is not required to make any special showing that repaying the debt constitutes an “undue hardship” in order to discharge that debt in bankruptcy—even though the services rendered in exchange for the debt likely saved the debtor’s life.

So debtors who voluntarily take on credit card debt they later can’t repay are asked zero questions as to why or what possible lifestyle changes they could make to pay it back. And debtors who suffer an illness or catastrophic injury and involuntarily become indebted to doctors and hospitals are also not asked to explain anything. But certainly the Internal Revenue Service isn’t going to let debtors off the hook so easily. As they say, only two things in life are certain: death and taxes. But even there, it’s only a debtor’s income tax liability for the previous three years that survives a bankruptcy filing; anything older than that will be discharged without the debtor taking any special steps. 

Given that debt incurred for less laudable purposes or for reasons wholly outside of a debtor’s control is easily discharged—in whole or in part—in a bankruptcy, it is baffling why a debtor who dared to take a risk on higher education fares worse when that investment doesn’t pan out as expected. 

Student loan debt in this country is about to pass $2 trillion and is wreaking havoc on former students’ ability to contribute to the economy in the ways one would like to see. If the answer is bankruptcy reform, maybe we simply treat student loan debt as any other garden-variety debt like Senator Durbin proposes. Or perhaps we find a middle ground where student loan debt incurred a certain number of years back is dischargeable while more recent loans survive with the hope that the newly-minted young professional proves successful in his or her new career. 

If that paradigm is good enough for the IRS, why not for the Department of Education? 

Whatever solution is arrived at, a solution is needed and we should expect to continue to hear about it on the election trail until one is found. In the meantime, if you’re a student struggling to pay back your student loans, you should consult with an experienced bankruptcy practitioner to see what options may be available to you under the current statutory framework.

About the Author: Zakarij Laux concentrates his practice in bankruptcy and restructuring, workouts, creditors’ rights, and complex business litigation. Zak has represented national lending institutions and loan servicers, commercial landlords, receivers, creditor committees, debtors, and bankruptcy trustees at the trial and appellate levels and through post-judgment execution.