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One of the things that sets student debt apart from all other types of debt is that it is almost impossible to get rid of. Even borrowers who find themselves in such dire financial straits that they file for bankruptcy find it difficult to make a fresh start without their student loans.
But a few cases that make their way through the legal system could change that. They raise the possibility that the courts may offer a more flexible definition of a borrower’s hardship before a bankruptcy judge can justify paying off his loans.
The atmosphere is ripe for the courts to consider this issue, says Rafael Pardo, professor at Emory University’s law school. Student debt has become more prevalent since 2005, the last time a United States Court of Appeals passed a standard on when it is appropriate to release a student loan in bankruptcy. In addition, the lower courts have also had the opportunity to rule on the matter in recent years, increasing the likelihood that the Supreme Court will want to give its opinion as well.
“It seems like there is a lot of buzz and activity and maybe the climate is right to finally find some sort of resolution to this problem,” Pardo said, noting that over the 10 years he studied the subject, he has not seen so much right. activity that surrounds it. “That makes it quite interesting.”
Currently, the law requires a borrower to prove that paying their student loans would expose them to “undue hardship” in order for that loan to be discharged in the event of bankruptcy. But different courts have adopted different standards for what that means.
In most countries the courts of appeal apply what is called the Brunner test to determine if a debtor is eligible for the discharge of his loans. This test, developed in the 1980s, requires a borrower to prove that he cannot maintain a minimum standard of living if he is forced to pay his student loans, that his situation is likely to remain that way for the rest of the year. time and made a good faith effort to repay the loans.
The Eighth Circuit, which covers Minnesota, Iowa and other central states in the country, is the only one of the nation’s 12 circuits to officially apply a different test – and many would say less stringent. This test is called the set of circumstances, which takes “the big picture” of whether the debtor’s situation reaches the level of undue hardship, according to Pardo. “It’s not that one single factor is actually going to make or break the case for you as a debtor,” he said.
Another of the nation’s circuits, the First Circuit, which covers Maine, Massachusetts and other parts of New England, has not officially adopted a standard for assessing student debtors in bankruptcy, but it could weigh in soon. . One of the cases he is reviewing is that of Robert Murphy, who has been unemployed since 2002. He applied in 2012, at the age of 62, that the more than $ 200,000 in Parent PLUS loans he contracted to fund the college education of his three children to be released as part of bankruptcy proceedings.
If Circuit 1 chooses to pass the totality test, it would harden the division between circuits, which often “captures the attention of the Supreme Court,” Pardo said.
But there is another case that may end up in the Supreme Court first. Mark Tetzlaff, a Wisconsin man in his 50s who had $ 260,000 in business and law school student debt when he filed for bankruptcy in 2012, appealed his case to court supreme last week. He asks the High Court to reconsider a ruling made by a seventh Circuit Court of Appeal judge earlier this year who found Tetzlaff’s financial situation did not deserve to write off his student loans in bankruptcy . Tetzlaff has struggled to find stable employment in recent years, has yet to pass the bar exam despite two attempts, and has also struggled with alcohol abuse.
The court used the Brunner test to determine that Tetzlaff cannot pay off his loans in bankruptcy. Douglas Hallward-Driemeier, attorney for Tetzlaff, said the Brunner test requirement to prove a “certainty of desperation” is very different from requiring a borrower to prove that paying off a student loan would cause him undue hardship – the standard set by Congress in the 1970s.
Hallward-Driemeier, one of the attorneys who argued the marriage equality case in the Supreme Court earlier this year, said “there is no doubt” that Congress wanted to make sure borrowers didn’t would not take advantage of the bankruptcy code to get rid of their student debt when they originally enacted the law. But considering all of a borrower’s circumstances does not amount to a “free pass”.
“Congress has not established a test that could never be satisfied,” said Hallward-Driemeier, partner at Ropes & Gray.
The stakes for the outcome of both cases are high for both student loan borrowers and taxpayers. If it becomes easier for borrowers to pay off their federal student loans, it raises the possibility that the Department of Education will lose the money it owes borrowers.
The department filed a brief in the Murphy case earlier this month, urging the First Circuit to pass the strictest test, arguing that Congress’ intention in requiring borrowers to prove undue hardship was d ‘prevent abuse of the bankruptcy system to get rid of student loans. . “The availability of ‘undue hardship’ discharge in bankruptcy has a direct bearing on the ability of the Department of Education to protect the fiscal stability of the loan program,” the department wrote in the brief.
For some borrowers, a simpler way to write off debt could provide much needed relief. One in four Student loan borrowers are in default or are having trouble repaying their loans, according to the Bureau of Consumer Financial Protection. Despite these relatively widespread challenges, few choose to get rid of the loan in bankruptcy.
According to an estimate by Daniel Austin, a professor at Northeastern University Law School, who tracks these cases in only one in 300 bankruptcy cases where the filer has student loan debt, the filer will try to get him discharged. This is despite the fact that for bankrupt filers with student loan debt, loans accounted for an average of 48% of their unsecured debt in 2013. And among those who are actually trying to get their loans released, about half are successful, Austin estimates.
Borrowers are reluctant to try to write off their debt both because of the perception that it is impossible to do so and because of the challenges involved, including filing a separate federal lawsuit in connection with the bankruptcy, Austin said.
“The structural obstacles are overwhelming,” he said. “I’ve seen cases where you look at debtors’ numbers on paper, you can show with mathematical certainty that they’ll never be able to pay that, but they don’t bring up the cases.”
