Student Loan Discharges in Bankruptcy Don’t Have to be the Unicorn of the Bankruptcy World

I think part of the reluctance of bankruptcy lawyers to take undue hardship cases is some bankruptcy attorneys just aren’t comfortable in court. Bankruptcy can attract those who are more of a technocrat than a litigator. Even if a bankruptcy lawyer is not interested in pursuing an undue hardship complaint, he or she usually knows who in their jurisdiction takes those sort of cases.

The other reason for the attitude of some bankruptcy lawyers is due to the tactics of businesses like ECMC that will fight even clear cut undue hardship situations. ECMC likes to argue that even borrowers in financial crisis don’t need an undue hardship discharge because they can qualify for an income driven repayment plan that can make their payment as low as $0.

I happen to think this is a bogus argument because IDR plans were not intended to preempt the dischargeability provisions in 11 USC 523(a)(8). That’s what ECMC did in the Richard Murphy case, an undue hardship case that heard by the First Circuit back in December, 2015.

ECMC ultimately agreed to a discharge of those loans but only after an extraordinary amount of time and that agreement was contingent on the case being remanded back to Bankruptcy Court for the order so the First Circuit didn’t have a chance to go on record debunking the Brunner test.

It is possible to get rid of federal loans and I’ve done that before, but it’s a risk for a lawyer to file that case if a client has limited resources. No question private student loans are easier to discharge due to the inapplicability of income driven repayment plans for federal loans.

Private student lenders are not flexible in offering repayment plan based on income. I had someone come to me for a student loan consultation who was told their payment was $2800 and didn’t care when the borrower told them they only made $2500 per month.

Private student lenders know the difficulties in discharging student loans and this encourages an arrogant attitude. A few student loan lawyers on a national listserv I’m part of signed up for an online seminar offered to entice lawyers into being student loan collectors just to hear what was being said. When I asked about the possibility of a collector losing a student loan due to an undue hardship complaint, I was told not to worry about it because that was the “unicorn of the bankruptcy world.”

That tells you all you need to know about why student loan collectors can act so unreasonably. There’s no question a debtor in bankruptcy does better with a lawyer than if he represents himself. Rafael Pardo, a noted expert on student loan law, recently completed an article called “Taking Bankruptcy Rights Seriously” that found that people with lawyers succeed twice as often in undue hardship litigation as borrowers representing themselves.

There’s no question student loan borrowers are not playing on a level playing field. That forces some of us lawyers to get more creative. One tactic is using Proof of Claims in a chapter 13 like in Hann. I have used the process for objecting to a student lender’s proof of claim to secure an order in Bankruptcy Court that National Collegiate Student Loan Trust does not have standing to collect a debt. While this does not wipe out the debt, it can be very helpful in defending later collection actions.

The above is not intended as legal advice for your particular situation. Questions should be addressed to student loan attorneys admitted to practice within your state. Richard Gaudreau is a lawyer admitted to practice in New Hampshire (NH) and Massachusetts (Ma) with a specialty in bankruptcy and student loans. He has litigated student loan issues in the U.S. Bankruptcy Court, First Circuit Bankruptcy Appellate Panel, and Federal First Circuit Court of Appeals. He may be reached through his website at attorneygaudreau.com, by email at Richard@attorneygaudreau.com, or by calling 603-893-4300.