Student Loan Bankruptcy Reform Law
In an ABI podcast two law professors discussed Student Loan Bankruptcy Reform Law. The topic was how student loans should be made more easily dischargeable in bankruptcy. They discussed possible methods on how to do it. One law Professor proposed student loans could be valued using what an unsecured lender pay for this debt, based on ability to collect it.
Daniel Austin examined over 3,000 bankruptcy cases from Pacer in 2011. First, 22.4% of these bankruptcy cases had student loans with the average student loan debt of 29,000. The amount is increasing. In 2010 21% of bankruptcy cases had student loan debt and the average amount of student loan debt was 24,600.
Second, his studies show private student loans tend to cause the problems. For example, private loans have higher balances, interest rates and defaults. When loans are given it targets minorities and their families with worthless loans for worthless degrees in discriminatory programs which are designed to make the schools and lenders money. Why underage students were advised to borrow $50,000 or more in minutes for useless degrees lacks explanation. These degrees provided no career with an ability to repay that debt in reckless lending practices.
Professor Cole testified before congress about using caution and that discharges should be based on the value of the education. See our PowerPoint on how to discharge student Loans
Brunner Student Loan Bankruptcy Law Reform
Not all courts and Circuits follow the Brunner test. The 1st, 8th and 9th Circuits have modified or adopted other tests. The 9th Circuit uses a totality of the circumstances test and look at the debtor’s future income and any other relevant factors. The First Circuit bankruptcy appellate panel originally approved and adopted Brunner. However it now rejects Brunner and also uses the totality of the circumstances test. The First Circuit still uses the 1st part of Brunner while rejecting parts 2 and 3 of the Brunner test.
By relying on a judge’s equitable powers one First Circuit Massachusetts Bankruptcy judge Feeney gave a partial discharge under 11 USC 105(a). In giving partial discharges some courts have allowed a discharge of some of the loans but not others. Now the First and Eighth Circuits give student loan debtors have a better chance of getting a discharge. Usually circuits have cases where undue hardship has been allowed. Sometimes the lender has simply failed to respond and a default has been issued.
You can listen to American Bankruptcy Institute podcast #116 at http://podcast.abi.org/657 with professors Daniel Austin of Northeastern University School of Law, G. Marcus Cole of Stanford Law School, with host David Epstein. This year attorney general Jack Conway and Deanne Loonin, attorney with the National Consumer Law Center also testified before congress which is debating student loan bankruptcy reform.