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11

Jun 2022

Are Changes on the Way for Bankruptcy and Student Loans?

Posted by / in Blog, Weekly Posts /

Are Changes on the Way for Bankruptcy and Student Loans?

There’s one big change Joe Biden can make (without Congress) so people who can’t afford to pay their student loans can clear them in bankruptcy.

During his presidential campaign, Joe Biden promised to help people who can’t pay their student loans.  So far, he’s helped people who got sucked in by scam colleges.  He provided closed school student loan forgiveness for people who went to ITT and Corinthian/Everest College.  Plus, for almost everybody, he suspended student loan payments because of the pandemic.

There’s talk now of $10,000 forgiveness across the board.  But that talk of $10,000 forgiveness across the board gets a lot of criticism.  It helps some people who don’t need help.  And does very little for people who really are overwhelmed.

There’s more that can be done.  That’s why pressure is building to treat student loan debt in bankruptcy like any other debt:  Ordinary debts debts that you can clear in bankruptcy if you can meet the bankruptcy requirements showing that you can’t pay.

“Undue Hardship”

student loan with undue hardship

Bankruptcy can discharge your student loans only if you can show undue hardship.

The bankruptcy law now says student loans can be cleared only in cases of “undue hardship.” Over the years the courts have said “undue hardship” basically means paralyzed, never work again.  Under that definition, according to the chief judge of the bankruptcy court here in eastern Virginia, you just can’t win in court on “undue hardship.” The judge said “that door is nailed shut.”

Calls for Change in the Undue Hardship Law

Recently, several news outlets have called for changes to the undue hardship rule.  Here’s a recent article in the Wall Street Journal.  And one from Politico.  And another in Bloomberg. 

But There’s No Chance Congress Will Act

Personally, I think there is zero chance that Congress will change the undue hardship rule, although there have been some steps in that direction.  Sen. Dick Durbin (D-IL) is a long-time supporter for better bankruptcy laws.  March last year he was able to get Sen. John Cornyn (R-TX) to join him on introducing a bill to change the undue hardship rule for people who had been struggling with student loans for more than ten years.

But I don’t think it will go anywhere. Why?  In our current political environment, support for bi-partisan cooperation often leads to defeat in the next primary.

On Bankruptcy and Student Loans, Biden Can Do One Thing

Government lawyers, the U.S. Department of Justice, go into bankruptcy court and fight against consumers trying to prove “undue hardship.”  Those government lawyers argue that the consumer should work longer hours or get their children to work to help pay for the loans.

Biden can call off those government lawyers. If the consumer, without government opposition, can persuade the judge–and that may still be tough–the consumer should win. And if the consumer wins at trial, the government should not appeal.

Let me tell you about Sandy Chamberlain

Sandy, not her real name, is a divorced mom with three kids, 17, 8 and 7. Her annual is $68,952 and she gets $900 a month in child support. (That will drop when the teen reaches her 18th birthday.) That seems like a lot of money but it doesn’t go far around here.

As a family of 4, she has automatic income eligibility to file Chapter 7 if she’s making less than $121,793. She’s under that eligibility cutoff by $42,000 a year!  And her student loans? Sandy has $70,757 in student loans.  Her payment, if ever hopes to pay it off, is supposed to be be $554.00 a month. Even though she’s $3500 a month below the average for a family of four in Virginia, and it’s considered no “undue hardship” to make her pay $554 a month on the student loan.

Never gonna happen.  That $554 almost makes her car loan payment and she needs that car a lot more.  (Besides transportation for herself and the kids, she does Instacart driving in months where the food and money run out before the next paycheck.) The government will never get the $70,757 student loan paid. And $10,000 student loan forgiveness won’t really change that.

Rents around here are shooting up even faster than housing prices.  If Sandy’s bankruptcy could clear her student loans, she’d be eligible to buy a house in a couple years.  But with $70,000 in student loans just sitting there unpaid, she can’t ever get a mortgage. (And that blot on her credit means she pays higher interest on her car loans, too.) 

Can Sandy Come Back?

Sandy’s bankruptcy will be over this July. And we can’t do anything about her student loans now, because we can’t win when the government lawyers come in to fight against us. But if President Biden changes the government policy later this year–or next year–Sandy will be able to come back to court. Under the law, Sandy is allowed to reopen her bankruptcy case for “further relief.” 

A chance to show hardship would be a relief.

The Whole Idea of Bankruptcy

The whole idea of bankruptcy is that the country is better off if people who cannot pay their debts are able to start over. That should apply to student loans, too.  For people whose degree has made them good money, bankruptcy wouldn’t apply.  For people who just can’t pay, those people, and their kids, and the country are all better off if the debts are cleared.

We’re hoping Joe Biden agrees and will help Sandy out.  

 

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Robert Weed has helped fifteen thousand people file bankruptcy in Northern Virginia. Robert Weed is a frequent panelist and speaker at the meetings of the National Association of Consumer Bankruptcy Attorneys. He is one of Northern Virginia’s most experienced personal bankruptcy lawyers. As an expert on changing consumer bankruptcy laws, Robert Weed has been interviewed on local and national TV and quoted in newspapers across the country.

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