Recent court rulings could extend bankruptcy for student debt

A ruling this week by a federal judge in New York illustrates how some courts have, in recent years, made it easier for people with crippling student debt to file for bankruptcy, according to consumer advocates and legal experts.

But while advocates like John Rao, a National Consumer Law Center bankruptcy expert, see the trend as positive, they still believe federal laws need to be changed to make it easier to pay off student loans through bankruptcy.

The problem has grown in importance as the number of Americans in student debt has risen to about 45 million, many of whom are unable to repay their loans. Lawyers as well as some lawmakers, including Senator Elizabeth Warren, the Massachusetts Democrat seeking her party’s presidential nomination, said changes to federal law and legal interpretations by the courts notoriously difficult to obtain the discharge of student loans through bankruptcy.

Before changes to federal law in 1998, people unable to repay their student loans could file for bankruptcy after five years without proving that the debt constituted “undue hardship.” But after the changes made by Congress, those seeking relief through bankruptcy for student loans, unlike other forms of debt, must show that they meet the standard of hardship, no matter what. or the age of the loan.

Congress, however, has never defined what undue hardship means and has not delegated the ability to do so to the US Department of Education. It was left to the courts to establish a three-part test to determine whether there are difficulties: that borrowers could not maintain a minimum standard of living if they had to repay the loans, that the situation would continue to be exist and that the borrower had made a good faith effort to repay the money.

But like Cecelia Morris, chief justice of the United States Bankruptcy Court for the Southern District of New York, noted in a decision On Tuesday, the courts set the bar high to respond to these tests. So much so, she wrote, “that most people (bankruptcy professionals as well as lay people) believe that it is impossible to pay off student loans.

For example, some courts have required people to prove that they will face hardship in perpetuity, an obviously high bar. “There’s no way they’ll ever win the lottery,” said Matthew Bruckner, associate professor of law at Howard University, for example.

But some judges over the past five years have taken a broader view of the standard of hardship for authorizing bankruptcy as more and more people are unable to pay off student loans coming to court, Rao said. .

Morris, in granting former law student Kevin Jared Rosenberg summary judgment so he could file for bankruptcy, interpreted the difficulties in several important ways. She found, for example, that Rosenberg didn’t have to prove that paying off the loan would be a hardship forever, but only for a significant portion of the repayment period. That period ended when the Educational Credit Management Corporation called the $ 221,385 Rosenberg still owed after earning a bachelor’s degree from the University of Arizona and a law degree from Cardozo Law School at Yeshiva University. Obviously, Rosenberg couldn’t pay.

The impact of the decision has its limits. Other bankruptcy judges do not have to follow Morris’ example.

“It doesn’t bind anyone,” Rao said. He also expects the decision to be appealed. Neither the ECMC nor its lawyer, Kenneth Baum, immediately responded to the emails.

However, Rao said the move could be significant because it is one of many over the past five years that have taken a broader view of meeting the standard of rigor. Other judges who have wanted to allow people to file for bankruptcy over their student loan debts might see decisions like this and see that they too can take a broader view.

In another case, he said, a Chicago federal appeals court ruled in 2013 that an unemployed 52-year-old woman who lived with her mother couldn’t repay her student loans and could file for bankruptcy. .

A lower court had dismissed his petition saying that even though the woman – who was living on public assistance and couldn’t afford to pay even $ 1 a month as part of a repayment plan – could be in able to make his payments if his outlook ever improves. But the appeals court ruled that if that was the norm, no one could ever file for bankruptcy because their prospects might one day improve.

Still, there seems to be some political momentum to change the standards. The Department of Education in 2018 reported he could change the standard of hardship when soliciting public comments on the threshold.

“It’s all well and good,” Rao said. But even with a new standard, he said borrowers would still have to go to court to prove they’ve hit the threshold. And those who are struggling with student debt and considering bankruptcy usually can’t afford a lawyer.

Rao’s group instead told the ministry that loan holders should not be allowed to oppose bankruptcy discharges in certain cases, such as when borrowers receive Social Security, have been declared unemployable by the U.S. Department of Veterans Affairs or caring for an elderly, sick disabled family member.

The NCLC also supports a bipartite project bill offered last May. The bill, co-sponsored by Warren, would remove current restrictions on student debt in bankruptcy and treat student loans like other types of consumer debt.

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