In 1999, Congress took steps to make it significantly more difficult to discharge student loans in bankruptcy. The Bankruptcy Reform Act of 1999 did not actually become law, nor did the 2001 iteration (the Bankruptcy Reform Act of 2001), but the law was included, in nearly identical language to that from the attempts in 1999 and 2001, in the 2005 overhaul known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
An interesting, somewhat quizzical article which documents the big-name Congressional Democrats who voted for BAPCPA is here (noting that it makes sense for Republicans to have voted for the bill which made student loans like "tattoos" but that Democrats also voted for it despite being heralded as the "warmer, softer party.")
Backing up a bit, student loan debt is driving a growing number of youngsters and their support-folk (i.e., parents) toward bankruptcy, pursuant to a survey released this week (It was released on February 7, 2012).
The numbers show that greater than 80% of bankruptcy attorneys say they've seen a remarkable uptick in the number of would-be clients with student loan debt, and almost 50% of the attorneys saying that the growth has been significant. These data are reported by the National Association of Consumer Bankruptcy Attorneys, of which this Bucks County bankruptcy attorney is a member.
Nearly a fourth of lawyers say the number of prospective clients with with student loans has nearly doubled and an additional third of attorneys say the number has increased 25% to 50%.
One of the most cited issues for rising student debts is the lack of employment for college graduates. Add to this the rising cost of education admidst cutbacks in student aid in the universities and colleges themselves and the situation looks bleak. Often, going to school and taking on debt is an option to finding employment: the thinking being that the loans associated with the education will get more than compensated for by the increase in pay when the debtor graduates. Living on credit, then, becomes an attractive option, odd as this may sound.
The numbers tell the tale. The average student loan debt for graduates in the 2010 college class was over $25,000, an increase of over 5% from the 2009 class. The trend is not receding.
Taking on credit card debt can be a superior form of paying for education than taking on student loans as the former is dischargeable in bankruptcy and the latter is not. There are benefits to the student loan, of course; the first is that credit limits, especially for young people just starting college after high school, rarely match tuition costs. Secondly, the student loan can be subsidized (meaning interest is not generated during the period the student remains enrolled). When graduated, a debtor may find that after the short window of non-repayment (assume 6 to 9 months) expires, a deferment or forbearance is required due to lack of meaningful employment in the field. But, ultimately, a bill will come and there can be real sticker shock and a genuine inability to pay it. This then mounts the fees and can subject the debt to collections efforts.
Student loans can be discharged, however, but the means of effectuating this discharge are arduous. There is a three-pronged test, which stems from Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 [2d Cir. 1987], which the courts employ to determine eligibility for discharge. The prongs are notoriously difficult to achieve. Specifically, to qualify, the debtor must show (1) that they cannot maintain, based on current income and expenses, a minimum standard of living, which includes a standard of living for their dependents, if the student loans are compelled to be repaid; (2) that additional circumstances exist which indicate this financial situation is likely to continue for the bulk of the repayment period of the loans; and (3) that the debtor has made good faith efforts to make payment on the loans.
Each prong is wrought with hurdles but the first two prongs are exceedingly tough to overcome. Consider that the standard of living contemplated here is even below the poverty line. Many people live below the poverty line for a time, especially when they are unemployed. This is not what is being considered. It is, instead, a more global examination which takes into account factors more than just recent pay stubs (or lack thereof). Similarly, the second prong presents a major hurdle in that there is no easy way for the debtor to show they will not utilize the education to gain better employment. Indeed, knowledge itself can be the reason to get educated, not just the work associated with it. So, to discharge it, there must be a factor similar to the aged person who is near retirement and has no income or the person who paid for an education at an unaccredited school (these have been held to be dischargeable, by various courts).
NACBA expressed concern that the problem is not abating...in light of the increasing amount of personal debt held by the average American. This leads many to believe a double-dipped recession is coming, or worse. This would lead, invariably, to further increasing numbers of bankruptcies. If you have questions about bankruptcy and would like to discuss them with a Bucks County Chapter 7 attorney, please call or email us.
