New and Improved Student Loan Bankruptcy Discharge

Categories: Chapter 7, Fair Debt Collections Practices, Student Loans & Bankruptcy

Getting rid of those pesky, overwhelming student loans in bankruptcy just got a bit easier, thanks to a case in which an attorney won a bid to shed $250,000 in student debt. The case is In re Barrett, No. 14-43516; Barrett v. U.S. Department of Education Direct Loan Servicing Center et al., Adv. No. 14-4161, 2016 WL 549377 (bankr. N.D. Cal. Feb. 10, 2016).

Mr. Barrett was an attorney with a spotty work history who was burdened by nearly $250,000 in student loan debt.  At age 56, he had years of negative income despite great effort to find employment, according to the facts of the case. Judge Novak found that Barrett “lives a spartan life,” noting that he had been driving the same car since 2003.  Other facts noted by the court include:  expenses exceeded income supplemented by food stamps; no assets to liquidate; no savings or retirement; and he made more than 12 years of payments on the student loans.

Judge Novak wrote, “Simply, a law degree and years of practice do not equate to a living wage,” adding that, “If Barrett has been unable to establish a viable law practice after 28 years of practice, it is a fool’s errand to presume that his 29th or 30th year will be any different.”

As you could have guessed, counsel for the government argued that the debtor should have instead applied for the Income-Based/Income Contingent repayment plans found here. The court maintained, “Given Barrett’s other good-faith efforts, his failure to pursue an income-contingent repayment plan is not damming.”  I agree that these “administrative” remedies are not required before seeking an undue hardship discharge of student loans in bankruptcy. It’s a start, before coming to bankruptcy, but by no means is it a requirement for making a good faith effort to repay student loans.  See In re Birrane, 287 B.R. 490, 495 (9th Cir. BAP 2002); Williams v. ECMC 341 B.R. 62 (2003).

A bankruptcy discharge of student loans is not impossible, but rather, requires:

  1. That you can find an attorney competent and willing to take your case or you file without a lawyer;
  2. That you not only file for bankruptcy, but also you must file an adversary proceeding (a lawsuit) during your bankruptcy case, for a bankruptcy court order that specifically allows the student loan debt to be included in your bankruptcy discharge;
  3. You Must Pass the Test (The Brunner Test), if you’re in California:
    • You must have a present undue hardship and filing under Chapter 7 of the Bankruptcy Code might generally satisfy this requirement; AND
    • You have circumstances beyond your reasonable control, that are likely to persist; AND
    • You have made a “Good Faith Effort” to repay your student loans.

I’ve mentioned in the past that medical conditions were a great way to satisfy the requirement that additional circumstances exist that would otherwise prevent the borrowers to repay their student loans.  However, with the Barrett case, we can see that a dismal and spotty career, coupled with enormous student loan debt, can now support an undue hardship discharge of student loans.

I’m excited to see if this would encourage more attorneys to help their clients discharge their student loans and if more folks might seek a bankruptcy discharge due to the overwhelming disparity between what they owe on their student loans as compared to the income they earn as a result of a stumbling economy, lower wages, and non-existent jobs.

Here’s my #Protip to lawyers when considering an undue hardship case for student loans:

  • Has a combination of both federal and private loans
  • Loans are in “good standing;” in deferment, forbearance, repayment, IBR, ICRP, etc.
  • debtor cannot afford to live a minimal lifestyle AND repay her student loans at the same time
  • the amount of the debt far exceeds income (If the student loan debt looks like a mortgage, and the debtor is making less than median income, I would consider an assertion of undue hardship is present)
  • debtor has maximized income AND minimized expenses in every conceivable way
  • other circumstances exist, that are beyond the debtor’s reasonable control and likely to persist for at least 10 years
  • caring for ill/disabled self, or family members
  • debtor has medical conditions that prevent more income, less expenses, and repayment

As of today, the total amount of student loan debt in the United States is $1,363 TRILLION DOLLARS. Source U.S. Debt Clock. Student loan debt will continue to rise unless we stop runaway student tuition during a debilitating economy, at least. We also need to reduce collections costs and abusive debt collection practices among the loan servicers and default servicers. Finally, seriously, do I have to mention that we need to focus your education toward future economic needs rather than the whims of Millennials?  I just said it.

On a positive note, I have seen more of these “for profit” colleges and schools, have had their ability to accept federal student loans removed.  When the Feds come for an audit, these shoddy schools fold under the pressure, leaving students with useless degrees and mountains of debt.  I would consider these cases for bankruptcy as well, after exploring all options.  If the school closed while the student was actively enrolled, there is an administrative remedy available to students, here.

Last month, the Wall Street Journal reported that More Than 40% of Student Borrowers Aren’t Making Payments. Another article provides a deeper look at the issue, citing that more than 16% of borrowers are currently in default on their student loans.

I would NOT advocate for a government controlled “free” education system because we need innovation to move our economy forward and I believe government control would stifle such creativity. I would, however, advocate for Not-for-profit, charter schools that provide quality education at a reasonable rate, based on a determination of what is reasonable.  Hey listen, if my fees are under scrutiny by the courts, so should yours, Mr. ILiveInAnIvoryTower!

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