New document aims to shatter ‘myth that student loans are non-repayable’
Recent court decisions prove that student debt can be canceled in the event of personal bankruptcy.
But most borrowers are unaware of this fact and lenders regularly exploit this ignorance.
“About half of all bankrupt student loan debtors would get relief if they took the right legal steps,” said Jason Iuliano, a student debt and bankruptcy expert. forthcoming article in the Duke Law Journal. “Unfortunately, since almost everyone has bought into the myth that student loans are non-repayable, most debtors don’t take these steps.”
The widespread acceptance of this myth created the student loan bankruptcy gap, which is “a situation unprecedented in law,” according to the newspaper. “Nowhere else have so many people sought legal assistance when so few have received it.”
According to Iuliano, the student loan bankruptcy gap has persisted for decades, due to the manipulation of creditors: lenders preemptively settle cases that would form the basis for broader student debt cancellation through bankruptcy.
Based on an analysis of student loan bankruptcy proceedings, Iuliano found that lenders “are actively stacking all the cases in their favor” to make the process more difficult for student borrowers seeking redress during the personal bankruptcy process.
“Specifically,” the document states, “the data shows that creditors have adopted a business screening strategy” that “skews” legal decisions and “masks the true likelihood of getting a student loan discharge”.
This amounts to “strategic settlement – a process of settling unfavorable cases to avoid unfavorable precedents and aggressively advocating favorable cases to tip the law in their favor.” And through this strategy, “creditors have succeeded in cultivating a myth of non-revocability – a myth to which academics, bankruptcy lawyers and media commentators all subscribe.”
‘Throw 50 thousand dollars on a case and make it go ‘
The process of personal bankruptcy related to student debt initially seems relatively straightforward.
A debtor seeking financial relief typically files for Chapter 7 or Chapter 13 bankruptcy and then initiates adversarial proceedings for their student debt.
The commonly held idea is that debtor student loans are excluded from any relief, and statistics seem to support this belief. But the opposite is true.
Under bankruptcy law, student loan debt can be released in two ways.
Either a student debtor successfully argues that his student loan was not an “educational benefit” as defined by subsection 523 (a) (8) of the bankruptcy code, and can therefore be set aside or “revoked” by a court, or they successfully argue that debt creates “undue hardship”.
When a debtor makes this first argument – that the loan is not an educational benefit – the lender has often insisted on settling this case, noted Iuliano, so that a judge’s decision does not set an unfavorable precedent. for creditors.
In other words, since the settlement of the case protects the winning arguments from public view because they are mostly confidential, they will have no effect on how future cases play out in court. .
“Let’s just say there’s an average consumer bankruptcy lawyer, and their client comes to them,” Iuliano told Yahoo Finance. The complainant’s lawyer, in reviewing the file, reviewed the available resources and pulled out the old files. “But what they’re not going to do … is look for the settlements, because they are not precedents, they are not binding and many of them are confidential.”
The lawyer, looking at the odds, would often advise the client against trying to file for bankruptcy for their student loans.
So not only is it “nearly impossible” to go through the bankruptcy process to clear your student debt, said Bill Kransdorf, NYC Bankruptcy Assistance project director at Yahoo Finance, but it also becomes “nearly impossible to get a lawyer. ” in the first place.
This, in turn, perpetuates the myth that student debt is untouchable by bankruptcy courts.
Also, added Iuliano, “creditors have these long-term incentives” to maintain this system because “they’re happy to throw $ 50,000 into a case and make it go away.”
Most student loan creditors in the United States operate federally guaranteed loans, which means the government is often a party to this process as well.
“The banks and the Ministry of Education are manipulating the courts to prevent legitimately repayable debts from being discharged,” Kransdorf said. “They should look at the law objectively and choose not to retain incorrect interpretations of the law.”
Kransdorf pointed out that one of the main ways to help solve this problem is for Congress to make the release of student loans in bankruptcy more accessible through legislation, such as the Student Borrower Bankruptcy Act, 2019.
Student loan bankruptcy gap will persist ‘unless something changes’
Over the past decade, Iuliano found, more than two million Americans with student debt have filed for bankruptcy.
However, the vast majority of these debtors – over 99% – have not filed adversarial proceedings to request the release of a student loan.
Many of those who have filed adversarial proceedings have seen a positive outcome. In 2017, for example, 241,000 student loan debtors declared bankruptcy and 447 of them filed adversarial proceedings.
Of these 447, 61% have seen at least part of their debt written off.
Examining the data more closely, Iuliano found that only six of these borrowers ended up being discharged in full by a court ruling on the merits.
234 other cases involving adversarial proceedings were settled and part of the student debt was discharged.
And 26 cases ended with a “default judgment,” meaning the lender did not even respond to the borrower’s request and therefore obtained full redress from the court.
Ten cases are still pending.
Findings suggest that student loan borrowers who filed for bankruptcy and fought for debt cancellation often succeed, further shattering the no-discharge myth and narrowing the student loan bankruptcy gap. .
The student loan bankruptcy gap “has hurt millions of Gen Xers,” added Iuliano, “hurts millions of millennials and will hurt millions of Gen Z – unless something changes ”.