Author Topic: Apparently you can discharge a student loan through bankruptcy  (Read 8243 times)

Nords

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http://www.businessweek.com/articles/2014-05-06/you-can-get-student-loans-forgiven-in-bankruptcy-but-its-far-from-easy#r=hpt-ls

As the URL says, though, it's not easy.

Quote
Conventional wisdom once held that it was almost impossible for debtors to get off the hook for student loans, even after they declared bankruptcy. That thinking was challenged by a 2012 paper in the American Bankruptcy Law Journal that showed that a high percentage of those who sought a release from their student debt were successful. A decision handed down last month in U.S. District Court in Alabama shows that success rates aside, the standards for winning a discharge (legalese for having your loan obligation canceled) are plenty high.

[...]

For the most part, bankruptcy courts have adopted something called the Brunner test for such cases, requiring debtors to meet three requirements:
The student loans must prevent her from maintaining a “minimal” standard of living,
she needs to demonstrate a good-faith effort to maximize income and limit expenses, and
she must show that her hardship is likely to continue for a “significant portion of the repayment period.”

Traditionally, that standard has been considered almost impossible to meet because debtors effectively have to prove they’re not only destitute, but also that they’ll stay that way for most of the loan’s life. Writing in American Bankruptcy Law Journal in 2012, Princeton University doctoral candidate Jason Iuliano estimated that 39 percent of debtors seeking to discharge student loans in 2007 were at least partially successful. Two other findings from Iuliano’s study: Only a tiny fraction—217 out of more than 169,000 of eligible bankruptcy filers in his sample—sought student loan discharges. But another 69,000 filers probably had good cases for relief
.

Business Week also suggests that going into debt for a sociology degree is a bad idea...

chucklesmcgee

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #1 on: May 08, 2014, 12:11:40 AM »
Right. And by "not easy" it's extraordinarily hard. Showing hardship is likely to continue for a “significant portion of the repayment period” basically means that you have to show your income will never increase to the point that it's not a hardship. And if you're a healthy, able-bodied person with a college degree, it's nearly impossible to show you could not get a job in the next 5-10 years that would allow you to make these payments.

randymarsh

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #2 on: May 08, 2014, 06:01:38 AM »
I suspect the belief that "YOU CAN'T DISCHARGE STUDENT LOAN DEBT EVER!" creates a self-fulfilling prophecy. If you're filing, you might as well try to get the student loan discharged too (even partially). Even if it gets denied, you can still get the other stuff (cars, credit cards, etc) discharged AFAIK.

S0VERE1GN

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #3 on: May 08, 2014, 06:38:51 AM »
juuuuuuuuuuust pay em off  :)

dragoncar

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #4 on: May 08, 2014, 03:41:38 PM »
Right. And by "not easy" it's extraordinarily hard. Showing hardship is likely to continue for a “significant portion of the repayment period” basically means that you have to show your income will never increase to the point that it's not a hardship. And if you're a healthy, able-bodied person with a college degree, it's nearly impossible to show you could not get a job in the next 5-10 years that would allow you to make these payments.

Yeah, might as well post a new thread "Apparently you can become an astronaut.... it's just not easy"

Nords

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #5 on: May 08, 2014, 08:08:02 PM »
Right. And by "not easy" it's extraordinarily hard. Showing hardship is likely to continue for a “significant portion of the repayment period” basically means that you have to show your income will never increase to the point that it's not a hardship. And if you're a healthy, able-bodied person with a college degree, it's nearly impossible to show you could not get a job in the next 5-10 years that would allow you to make these payments.

Yeah, might as well post a new thread "Apparently you can become an astronaut.... it's just not easy"
Snarky commentary aside, there's this quote in the article:
Quote
Writing in American Bankruptcy Law Journal in 2012, Princeton University doctoral candidate Jason Iuliano estimated that 39 percent of debtors seeking to discharge student loans in 2007 were at least partially successful. Two other findings from Iuliano’s study: Only a tiny fraction—217 out of more than 169,000 of eligible bankruptcy filers in his sample—sought student loan discharges. But another 69,000 filers probably had good cases for relief.

I was under the impression that student loans could not be discharged via bankruptcy.  That impression appears to be outdated, and it's the first time I've seen evidence (not just anecdotes) that they can be discharged.

Maybe some other magazine will do a followup on the value of a sociology degree...

dragoncar

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #6 on: May 09, 2014, 12:00:23 AM »
Right. And by "not easy" it's extraordinarily hard. Showing hardship is likely to continue for a “significant portion of the repayment period” basically means that you have to show your income will never increase to the point that it's not a hardship. And if you're a healthy, able-bodied person with a college degree, it's nearly impossible to show you could not get a job in the next 5-10 years that would allow you to make these payments.

Yeah, might as well post a new thread "Apparently you can become an astronaut.... it's just not easy"
Snarky commentary aside, there's this quote in the article:
Quote
Writing in American Bankruptcy Law Journal in 2012, Princeton University doctoral candidate Jason Iuliano estimated that 39 percent of debtors seeking to discharge student loans in 2007 were at least partially successful. Two other findings from Iuliano’s study: Only a tiny fraction—217 out of more than 169,000 of eligible bankruptcy filers in his sample—sought student loan discharges. But another 69,000 filers probably had good cases for relief.

I was under the impression that student loans could not be discharged via bankruptcy.  That impression appears to be outdated, and it's the first time I've seen evidence (not just anecdotes) that they can be discharged.

Maybe some other magazine will do a followup on the value of a sociology degree...

It's not just snarky commentary.  Anyone with access to google should know that student loans are dischargeable to the extent you can show "hardship".  But hardship is homonymously hard to show, and that's why a fraction of a percent of people with student loans are successful.  If you are relying on bankruptcy to solve your student debt problem, you are an idiot.

Rural

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #7 on: May 09, 2014, 04:56:17 AM »
Right. And by "not easy" it's extraordinarily hard. Showing hardship is likely to continue for a “significant portion of the repayment period” basically means that you have to show your income will never increase to the point that it's not a hardship. And if you're a healthy, able-bodied person with a college degree, it's nearly impossible to show you could not get a job in the next 5-10 years that would allow you to make these payments.

Yeah, might as well post a new thread "Apparently you can become an astronaut.... it's just not easy"
Snarky commentary aside, there's this quote in the article:
Quote
Writing in American Bankruptcy Law Journal in 2012, Princeton University doctoral candidate Jason Iuliano estimated that 39 percent of debtors seeking to discharge student loans in 2007 were at least partially successful. Two other findings from Iuliano’s study: Only a tiny fraction—217 out of more than 169,000 of eligible bankruptcy filers in his sample—sought student loan discharges. But another 69,000 filers probably had good cases for relief.

I was under the impression that student loans could not be discharged via bankruptcy.  That impression appears to be outdated, and it's the first time I've seen evidence (not just anecdotes) that they can be discharged.

Maybe some other magazine will do a followup on the value of a sociology degree...

It's not just snarky commentary.  Anyone with access to google should know that student loans are dischargeable to the extent you can show "hardship".  But hardship is homonymously hard to show, and that's why a fraction of a percent of people with student loans are successful.  If you are relying on bankruptcy to solve your student debt problem, you are an idiot.


39% is not a fraction of a percent. It's hard to judge whether those who did not try would have succeeded or not, but the author suggests that 69k/ 169k would have had good cases; that's just over 40%. This idea of student loans not being dischargeable may start to change if more people start to try.

MayDay

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #8 on: May 09, 2014, 07:42:27 AM »
I had no idea SL debt could be discharged.  Sure, I could have googled, but I never thought to, since everything I have ever read on the subject says it isn't dischargeable. 

So thank you, Nords, for posting this and teaching me something today.

Quark

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #9 on: May 09, 2014, 07:47:27 AM »
I just wish there was some way to pay for them with pre-tax dollars. It doesn't seem like too much to ask for.

EMP

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #10 on: May 09, 2014, 08:00:11 AM »
I just wish there was some way to pay for them with pre-tax dollars. It doesn't seem like too much to ask for.

You mean aside from the interest subsidy during school and deferment and the fact that the govt was willing to lend a boatload of unsecured money to an 18 year old?

rocksinmyhead

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #11 on: May 09, 2014, 08:00:28 AM »
I just wish there was some way to pay for them with pre-tax dollars. It doesn't seem like too much to ask for.

oh man, that would be awesome.

Dezrah

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #12 on: May 09, 2014, 11:04:43 AM »
It was a while ago that I read the about the history of student loans and bankruptcy.  Apparently there was a brief trend where capable professionals (think doctors and lawyers) were racking up huge student loans then strategically filing for bankruptcy.  On paper they weren't practicing yet and the huge debt clearly met the traditional measures of dischargable bankruptcy.  Then they could start their practice with a clean slate and get to keep all the high income to themselves.  So they changed the laws. 

Personally I find it more interesting that all debt doesn't carry such a strict standard.  Why shouldn't medical bills or consumer debt get this level of claim?  That's not a rhetorical question, I really wonder why on social engineering level it makes sense to give student loans special treatment.

dragoncar

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #13 on: May 09, 2014, 12:39:33 PM »
Right. And by "not easy" it's extraordinarily hard. Showing hardship is likely to continue for a “significant portion of the repayment period” basically means that you have to show your income will never increase to the point that it's not a hardship. And if you're a healthy, able-bodied person with a college degree, it's nearly impossible to show you could not get a job in the next 5-10 years that would allow you to make these payments.

Yeah, might as well post a new thread "Apparently you can become an astronaut.... it's just not easy"
Snarky commentary aside, there's this quote in the article:
Quote
Writing in American Bankruptcy Law Journal in 2012, Princeton University doctoral candidate Jason Iuliano estimated that 39 percent of debtors seeking to discharge student loans in 2007 were at least partially successful. Two other findings from Iuliano’s study: Only a tiny fraction—217 out of more than 169,000 of eligible bankruptcy filers in his sample—sought student loan discharges. But another 69,000 filers probably had good cases for relief.

I was under the impression that student loans could not be discharged via bankruptcy.  That impression appears to be outdated, and it's the first time I've seen evidence (not just anecdotes) that they can be discharged.

Maybe some other magazine will do a followup on the value of a sociology degree...

It's not just snarky commentary.  Anyone with access to google should know that student loans are dischargeable to the extent you can show "hardship".  But hardship is homonymously hard to show, and that's why a fraction of a percent of people with student loans are successful.  If you are relying on bankruptcy to solve your student debt problem, you are an idiot.


39% is not a fraction of a percent. It's hard to judge whether those who did not try would have succeeded or not, but the author suggests that 69k/ 169k would have had good cases; that's just over 40%. This idea of student loans not being dischargeable may start to change if more people start to try.

TIL there are only 169k people with student loans. 

randymarsh

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #14 on: May 09, 2014, 02:32:17 PM »
It was a while ago that I read the about the history of student loans and bankruptcy.  Apparently there was a brief trend where capable professionals (think doctors and lawyers) were racking up huge student loans then strategically filing for bankruptcy.  On paper they weren't practicing yet and the huge debt clearly met the traditional measures of dischargable bankruptcy.  Then they could start their practice with a clean slate and get to keep all the high income to themselves.  So they changed the laws. 

Personally I find it more interesting that all debt doesn't carry such a strict standard.  Why shouldn't medical bills or consumer debt get this level of claim?  That's not a rhetorical question, I really wonder why on social engineering level it makes sense to give student loans special treatment.

I've always heard this, but have never seen any proof that this trend actually happened.  Even if it was happening, the fix was easy: don't grant discharges for X years from graduation. It's unlikely doctors/lawyers would wait say 3 years before starting to work.

It was easier to discharge private student loans until 2005. I believe government debt (including SLs) were always non-dischargable) http://en.wikipedia.org/wiki/Bankruptcy_Abuse_Prevention_and_Consumer_Protection_Act_of_2005

Then Congress was fed the line (by bank lobbyists) that people who file for bankruptcy are scum and are simply abusing the system. They had to be stopped! Never mind the fact that basically everyone who files has medical bills, lost their job, or had some other significant life event occur.

The purpose of bankruptcy is to give people a second chance. Sometimes life doesn't work out the way you think it will. It goes along with why we got rid of debtor's prisons (except for alimony & child support) and debt slavery. We decided that debt shouldn't send you to prison or force you to be destitute for the rest of your life.

The argument I hear about why it makes sense for SLs to not be discharged is because it's unsecured debt and lenders wouldn't make the loans to someone with unknown income potential and likely non-existent credit score if students could get rid of it. This makes no sense to me because credit cards are unsecured too (and their interest rate reflects this) and banks had been making loans for decades and I imagine at rates below CCs.

StarryC

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #15 on: May 09, 2014, 03:07:16 PM »
I think this would be exceptionally hard to prove for those eligible for income based repayment or income contingent repayment, which is most people who graduated in the last 5? 10? years.

Generally, I think disability will do it- i.e. you have a law degree, obtained a serious head injury, and now are unemployable.  Maybe a physical injury that would prevent you from working full time as well. 

I assume the higher than expected success rate is because people who file bankruptcy with a lawyer don't try it unless they've got a good argument.  People who are employable self select out of trying to discharge their student loan debt (and house, and maybe car) and just discharge consumer debt.

Honestly, as much as I wish I didn't have student loans, It doesn't seem fair to fully discharge them in most cases.  People with college/ professional degrees are the best able to pay them.  I think there should be more pre-college/ pre-loan education about the value of degrees and whether that degree from Private U is really worth 10x the cost of degree from State U.  There should be more oversight regarding for-profit schools, and more help for those who don't seem to be finishing school, despite the debt.

EMP

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #16 on: May 09, 2014, 04:17:41 PM »

Generally, I think disability will do it- i.e. you have a law degree, obtained a serious head injury, and now are unemployable.  Maybe a physical injury that would prevent you from working full time as well. 


You don't need bankruptcy for this.  That's what the Total and Permanent Disability Discharge is for.

szmaine

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #17 on: May 10, 2014, 10:35:57 AM »

Generally, I think disability will do it- i.e. you have a law degree, obtained a serious head injury, and now are unemployable.  Maybe a physical injury that would prevent you from working full time as well. 


You don't need bankruptcy for this.  That's what the Total and Permanent Disability Discharge is for.


Yeah, but then you are stuck paying income tax on the loan forgiveness amount which aside from making no sense is just disgusting.

http://www.nytimes.com/2014/03/28/your-money/disabled-borrowers-trade-loan-debt-for-a-tax-bill-from-the-irs.html?_r=0

Tami1982

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #18 on: May 11, 2014, 12:14:40 AM »

Generally, I think disability will do it- i.e. you have a law degree, obtained a serious head injury, and now are unemployable.  Maybe a physical injury that would prevent you from working full time as well. 


You don't need bankruptcy for this.  That's what the Total and Permanent Disability Discharge is for.


That is only applicable to federal government loans.  If you took any private loans they do not offer that discharge, but they are protected as student loans under law.  All the protections without the responsibilities.

EMP

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #19 on: May 12, 2014, 12:34:51 PM »

Generally, I think disability will do it- i.e. you have a law degree, obtained a serious head injury, and now are unemployable.  Maybe a physical injury that would prevent you from working full time as well. 


You don't need bankruptcy for this.  That's what the Total and Permanent Disability Discharge is for.


That is only applicable to federal government loans.  If you took any private loans they do not offer that discharge, but they are protected as student loans under law.  All the protections without the responsibilities.

What a racket!

thesinecure

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #20 on: May 13, 2014, 09:34:22 AM »
Why would anyone of sound mind be FOR more people not paying back their loans?

I love how being required to pay income taxes on defaulted/forgiven debts is somehow getting "stuck" and "disgusting".

You know what's disgusting IMO?  NOT PAYING YOUR DEBTS.

There are clearly exceptions, especially if someone has been permanently injured or disabled.  But for folks who took out boatloads of loans to get a poli sci degree from an expensive private school, I have very little  to no sympathy.  Decisions have consequences, and some of them have consequences for years and years.

You should always think about the consequences of debt, whether for school, for cars, for houses, for whatever it may be.  If you don't have a good plan on how to pay it back, you shouldn't do it and find an alternative.

randymarsh

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #21 on: May 13, 2014, 10:17:36 AM »
Why would anyone of sound mind be FOR more people not paying back their loans?

I don't think anyone is suggesting that everyone should be able to just run to the nearest courthouse and get their student loans discharged anytime they want. Of course people should pay back their loans.

But bankruptcy exists for a reason. In the case of private loans, I'm not sure why they deserve protection. You made an agreement with a bank just like you do with a credit card. The bank knew going into it that bankruptcy is a possibility.

thesinecure

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #22 on: May 13, 2014, 10:56:12 AM »
Why would anyone of sound mind be FOR more people not paying back their loans?

I don't think anyone is suggesting that everyone should be able to just run to the nearest courthouse and get their student loans discharged anytime they want. Of course people should pay back their loans.

But bankruptcy exists for a reason. In the case of private loans, I'm not sure why they deserve protection. You made an agreement with a bank just like you do with a credit card. The bank knew going into it that bankruptcy is a possibility.

Sure, but student loans are generally available with much lower credit requirements than many other types of loans, because there's no tangible asset in back of most of them to collateralize it.  Sure, sometimes co-signers are required but I know in my situation that was not the case (things certainly may have changed in 20 years).

I agree that bankruptcy exists for a reason, but I also believe that the bar SHOULD BE high for relief or discharge of student loans in particular.  These programs were put together to help improve access and flexibility for obtaining greater education, which in most situations should improved access to jobs with better wages, which then allows greater access to financially responsibility and independence, etc., etc.  I realize that's not 100% accurate, but on the whole that's the idea.

If more and more people are getting out on the very front end of that equation, how does that bode for the future?

What I'm mainly being critical of in this post is the idea that @ 40% of people who try actually get relief or discharge (which sounds like a pretty high percentage) and how that might actually encourage more people to add to the denominator.

That's not good overall in the long term.  It will ultimately increase the rates of the notes, make them harder to get and will absolutely have a spillover effect in terms of increasing the costs of the education (whether tuition rates, lower student admissions/acceptances, whatever the case may be - there's lots of different variables that can be negative impacted by increasing loan defaults).

And to be clear, I'm ALL FOR restructures and extensions without jacking to crazy interest rates, especially when the overall interest rate structure is so low.  What I'm against for the most part is discharge of the debt.

Rebecca Stapler

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Re: Apparently you can discharge a student loan through bankruptcy
« Reply #23 on: May 13, 2014, 11:20:59 AM »
Why would anyone of sound mind be FOR more people not paying back their loans?

I love how being required to pay income taxes on defaulted/forgiven debts is somehow getting "stuck" and "disgusting".

You know what's disgusting IMO?  NOT PAYING YOUR DEBTS.

There are clearly exceptions, especially if someone has been permanently injured or disabled. But for folks who took out boatloads of loans to get a poli sci degree from an expensive private school, I have very little  to no sympathy.  Decisions have consequences, and some of them have consequences for years and years.

You should always think about the consequences of debt, whether for school, for cars, for houses, for whatever it may be.  If you don't have a good plan on how to pay it back, you shouldn't do it and find an alternative.

The bolded are the people who are on the hook for paying taxes on the discharged debt. That was PP's point.