Student Loans and Bankruptcy

Throughout the past 10 years, clients have asked me on more than one occasion if they can wipe out their student loan debt if they can show repaying it would result in an undue hardship. Doesn’t sound like it would be that difficult, right? Well....different courts use different tests in determining whether it is an undue hardship. Regardless of which test is used in your jurisdiction, courts are reluctant to discharge student loans. Because of the wide range of decisions handed down by bankruptcy judges, bankruptcy lawyers are often reluctant to take a case of this nature which requires them to prove the borrower will never be able to make montly payments to the lender, and this is extremely difficult to prove. And if this wasn't enough, to even get the case to be heard requires the debtor to file a lawsuit in the federal court and this requires extra cash for the retainer required by the filing attorney. This, however, may be changing. On March 10, 2015, President Obama, while at Georgia Tech, unveiled his “Student Aid Bill of Rights.” The President stated: "Every borrower has the right to an affordable repayment plan. Every borrower has the right to quality customer service, reliable information, and fair treatment, even if they struggle to repay their loans." Prior to his visit to Georgia Tech, President Obama signed a presidential memorandum targeting third party lenders such as Navient (formerly Sallie Mae) who contract with the federal government to collect on loans. The targeted companies will be required to inform borrowers about possible repayment options and notify them when they are delinquent. As part of this mandate, President Obama directed administration officials to look into whether bankruptcy should be an option for all student loan borrowers. The review will most likely focus on loans backed by private lenders. While this will provide some relief, according to the Wall Street Journal only 10 percent of student loans are from private lenders. According to an article by PBS.org “the presidential steps aim to crack down on a student loan system known for being complex and confusing to navigate. In recent years, lawsuits and critical government reports have cast a light on industry abuses and the difficulties facing borrowers....A Consumer Financial Protection Bureau study last year found borrowers were getting little help when they ran into trouble and had few affordable repayment options.” I hear all too often from clients that the collection efforts of Sallie Mae, Navient and other companies are very aggressive. Most often clients feel as if they have no where to turn and are trapped into paying these high fees. While I have already received a number of phone calls and emails from clients regarding this proposed plan, I do believe it will be a while before anything is enacted. Any potential changes to the current Bankruptcy Code would have to be approved by Congress, which is currently controlled by the Republican party who oppose much of the President’s agenda.