Because perception is often reality, and the perception is that discharging student loans in bankruptcy is difficult, most folks believe this, attorney and non-attorneys alike. Thus, few ever attempt to discharge student loans via bankruptcy.
The fact is, the right debtor, with the right circumstances can discharge their student loans easily enough through bankruptcy. The better fact is, Judges are asking, even begging, for some of these cases. They see cases ripe for discharge, but are unable to say a word because of their position. What does that mean? It means we all need to seriously reconsider why we fear the difficulty of discharging student loans in bankruptcy.
Federal loans are difficult to discharge in bankruptcy because of the discharge test and how Judges choose to interpret it. To oversimplify the test, does your student loan payment present an undue hardship? Can you survive while making student loan payments? Key word – survive. It’s not about affording your triple skinny latte on your way to work. It’s about affording a car (basic, not luxury) to get to work. Federal loans have flexible, often affordable repayment options. For those with low income, it is possible to have a payment as low as $0 (ZERO!). Many Judges look at the short-term zero payment and rule against the debtor because there is no way a person cannot afford a zero dollar payment. The more astute Judges look at the long-term, the eventual taxable forgiveness, as a factor. These Judges realize that the taxable amount will likely be unaffordable, even though it may be 25-years away. Denying discharge now is simply kicking the can down the road.
Private loans are also difficult to discharge, but should not be. Why? Because demonstrating a hardship should be easy enough when considering the lack of flexible payment options for these loans. Most private lenders only offer two choices – pay or don’t pay. It should be easy to demonstrate that you cannot afford your $400, $600, or $1,000 a month minimum payment. If you’ve already defaulted, this should be even easier. Once defaulted, the lender accelerated the loan.There is no monthly minimum payment, the full amount is due. If that isn’t a hardship, what is?!
Writing as an attorney, I of course agree with this. The question is, how can a debtor who can’t afford student loan payments, afford an attorney? I’ll simply say that is a business question for each individual bankruptcy attorney to address. If you’re a persuasive debtor, negotiate with the bankruptcy attorney. Bankruptcy filings are declining, which means these attorneys are looking for work. Better they should take your case at a discount for some money, then decline it and not have any income. That is not to say these attorneys deserve to work for an insane discount that bleeds them dry. The process for discharging student loans is full scale litigation. Remember that you get what you pay for. If the price sounds too cheap, don’t be surprised if the lawyer gives up at the first brick wall – and there will be many brick walls.
The process for discharging student loans, called an adversarial process, is full scale litigation. Not all bankruptcy attorneys practice litigation for a variety of reasons. The litigation can be grueling, and is always driven by the facts and circumstances of the debtor. The more evidence there is of hardship, the easier things are. The more speculative the hardship, the more work to be done, including depositions of the debtor, debtor’s family, expert witnesses regarding economics, and perhaps even medical experts (which isn’t cheap). Then there is the litigation maneuvering and posturing. Is one side delaying, is the other-side filing countless (useless) motions simply to increase the expense to the debtor’s attorney (see above)? This is not a simple task. Worse, the case law is still developing, especially with private student loan discharge. Further, there may not be case law if parties agree to settle prior to going before a Judge. If the Judge doesn’t get to decide anything, there’s nothing on the books to help other attorneys determine how ANY Judge is likely to rule. Thus past litigation results are clouded in mystery which makes it much harder for an attorney to gauge the likely-hood of future success.
Many debtors are not necessarily looking to get out of their student loans. The bankruptcy discharge is a last resort because often times private lenders refuse to offer an affordable payment. If the lender continues to refuse an offer of an affordable repayment during a bankruptcy discharge process, they may very well lose. If, however, they offer something reasonable that is truly affordable, everyone wins. The debtor walks away with an affordable debt, the lender gets revenue it wasn’t getting before.
Bankruptcy discharge for student loans, while difficult, is not impossible. Debtors, and debtor attorneys, must realize that bankruptcy discharge for student loans is achievable. Fees can be structured to the satisfaction of both the attorney and the client, while litigation can be made more efficient through repetitive handling of these types of cases.
Just to be sure I’m practicing what I preach, I was hired this week to file an adversarial process to discharge student loans. It’s time to take the fear out of bankruptcy discharge for student loans.