Bankruptcy of Your Student Loans

Bankruptcy of Your Student Loans

Sunday, March 6, 2016

UNDUE HARDSHIP TEST PASSED WITH FLYING COLORS - STUDENT'S STUDY AND PREPARATION PAID OFF!

PASSING THE TEST OF UNDUE HARDSHIP-FINAL EXAM


Last week I declared my victory of winning a full discharge of nearly $130,000.00 without a trial, and completely without a fight from the Department of Education - Let's see how!


There is a test to pass have you prepared for it?


Based on what I have researched there is a seemingly endless cache of cases regarding the application of U.S.C. 11 §523 (a)(8) and the proving of undue hardship. The subject has been a topic of debate since it became a part of the bankruptcy code. Prior to 1978 student loans were treated like any other debt, and fully dischargeable by filing bankruptcy

Now nearly 40 years later the topic remains one in which debtors, creditors, amicus curiae, and courts are still struggling with. In spite of attempts to provide some standards to define undue hardship, bankruptcy courts have been left to create “tests” which have only created more controversy.


The facts are that even the different Courts do not use the same criteria or tests. While there remains much misinformation regarding the bankruptcy of student loans, there is no truth to the fallacy that student loans cannot be discharged in bankruptcy.  I also learned that most lawyers are not very educated in the area of student loans.


My own research uncovered several hundred cases where the courts have found undue hardship and allowed debts to be discharged. In fact, I found hundreds of cases where undue hardship was proven and student loans were discharged either partially or fully in bankruptcy.  Frankly, my sense is the number of student loan discharges may actually run into the thousands since 1978. Many of these discharges were accomplished without the aid of an attorney by debtors who acted on their own behalf as Pro Se debtor/plaintiffs.  



In fact, I am seeing that there are a significant number of cases and opinions where judges and amicus curiae briefs are calling for re-evaluation of the undue hardship tests being used and re-visiting the original intent of the legislation.  This is mainly due to the fact that today’s cases have more involved than a young student finishing college with a degree, starting a lucrative career, and then quickly filing bankruptcy to rid themselves of student loan payments.  And as I explain below, the history of the undue hardship provision is perhaps one that requires a full review.


The Beginning... Excluding Educational Debts from Bankruptcy


"The Bankruptcy Act of 1898, the predecessor to the current Code, did not provide any exceptions to discharge for student loans. This is unremarkable insofar as public education in the United States had not yet evolved into a benefit available to the masses through public funding.
The Commission on the Bankruptcy Laws of the United States, created by Congress in 1970, recommended that federal law be amended to prohibit the discharge of certain educational loans during the first five years of repayment, unless the debtor could establish that this prohibition caused a hardship.
Congress enacted such a law in 1976.  When the Code was being crafted in the late 1970s, the Senate and House originally disagreed on whether to keep this five-year non-dischargeability period, with the Senate favoring a continuation of the practice and the House initially favoring its elimination.  When the Code was finally passed, the Senate's position prevailed, and Congress enacted §523(a)(8)
Since then, Congress has, at various times, amended §523(a)(8) to extend its immunity from discharge to different types of educational loans that were not originally covered by its terms.  In 1990, Congress afforded student loan creditors even greater protection from the bankruptcy discharge by extending the automatic non-dischargeability period for such loans to seven years. 
In 1997, the National Bankruptcy Review Commission, which was tasked by Congress to conduct a comprehensive analysis of problems with the Code, recommended that §523(a)(8) be eliminated.  Congress was not persuaded.
Instead, when it next amended the Code in 1998, it eliminated the seven-year limitation period, which made all students loans non-dischargeable, absent a court determination that requiring debtors to meet their student loan obligations would constitute an "undue hardship."  
Clearly, Congress has progressively made student loans more difficult to discharge, and not the other way around. Consequently, both the text and history of §523(a)(8) lead to the conclusion that a debtor should bear a high burden in proving that a student loan debt is dischargeable The question with which federal courts have struggled is how to interpret the phrase "undue hardship."
The primary reason for the confusion in the courts is Congress's failure to define the term. Neither the term "undue" nor the phrase "hardship" are defined in the Code.  Thus, the judiciary is obligated to provide meaning for them under applicable cannons of statutory construction. It is clear that the courts are obligated to interpret §523(a)(8) according to its plain meaning. 
Thus, analysis of the concepts of "undue hardship" should, logically, begin with an understanding of the noun "hardship," which is qualified by the adjective "undue."  Source for above:  http://www.abi.org/abi-journal/chaos-in-the-courts-the-meaning-of-undue-hardship-in-11-usc-523a8-and-the-argument-for 
For more on the definitions of "undue" and "hardship", refer to my earlier post "I made my case on undue hardship..." 2/28/2016)


Why was the law changed?


Prior to 1978 student loans were treated like any other debt and could be directly included in a chapter 7 or 13 bankruptcy.  The history of student loans can be traced back to the days of the "space race" and the Russian spacecraft the "Sputnik" the first vehicle to successfully orbit the earth in 1957.  In an attempt to catch up, the President and Congress urged young school students to enter college and become scientists and engineers and other highly educated professionals.

To help this movement congress enacted the National Defense Education Act (NDEA). Part of the package included the provision for financing education through the creation of th Carl D. Perkinse National Defense Student Loan (NDSL) program.  Viola!  The student loan crisis was about to enter "warp speed"!

NDSL loans later inherited the name "Perkins Loans" named after Congressman Carl D. Perkins from Kentucky's 7th District who was an advocate of education for the under-privileged. In 1965 education loans got additional support from the government through the enactment of the Higher Education Act and the Guaranteed Student Loan Program (GSLP) which later took on the name Stafford Loans, again named for a proponent of higher education, Senator Robert Stafford, Republican from Vermont.

Stafford Loans were primarily funds from private lending agencies which had the backing or guarantee of the Federal Government.  Stafford loans were created to assist students who demonstrated financial needs that could not be met by family or other sources.  Repayment requirements for those who took out Stafford loans included forbearances and deferments to allow students to get on their feet and have gainful employment for paying back the loans.

While the 1965 Higher Education Act gave the poorest student a chance at an education by way of GSLP and the Stafford program, the American Middle Class were finding it difficult to afford a college education.  Thus in 1978 Congress passed another education act called the Middle Income Student Assistance Act, which virtually made federal loans available to all students regardless of need.

Concurrent with the increase in availability of government backed loan monies, the costs of education also increased.  Between 1965 and 1975 college costs increased by 75%. Student borrowing was reported to increase close to $2 billion between 1975 and 1979. 

As far as bankruptcies reported on student loans, there were only 760 nationwide between 1968-1970. However by 1976 that number had climbed to over 8,600, with nearly $33.1 million dollars discharged as unpaid loans.

This seemingly large rise in defaulted and insolvent loans alarmed many in the congress and the media, and resulted in the news groups creating a mild hysteria.  Stories of students taking out huge loans to earn college degrees, then a few days after graduating filing for a bankruptcy to dump the debt, reached the ears of the public who in turn demanded some in congress to investigate. 

While there were a few high profile cases where graduates took advantage of bankruptcy, the fact is that those few were the exception and not the rule.  Yet, the mere idea that this could lead to a landslide of student loans being discharged in bankruptcy, led congress to change the bankruptcy code in 1976.  Congress modified the Higher Education Act of 1965, and the college student was now being observed as a liability and not so much as an asset.

What congress meant to say.... and how they tried to say it


While history has shown that very few students actually abused the former Bankruptcy Code, the changes in 1976 setup a prohibition within 20 U.S.C.A. §§1097-3 with §439A which to put it into simple terms prevented a student loan from being discharged within the 1st five years of repayment "unless" such debt was an undue hardship!  (I paraphrased).

Most thought the use of a waiting period after graduation would ease the default issue and prevent the rush to file bankruptcy.  For this time period that may have been a reasonable assumption, based on the facts at hand. However that barrier soon fell short and needed a higher bar.

In 1978, §439A was repealed and replaced with similar language as part of a Bankruptcy Reform Act.  Thus 11 U.S.C. §523(a)(8) was born.  Student loans were not dischargeable in bankruptcy within the 1st five years, (thus an exception to norm where any unsecured debt could be readily discharged), with the Act retaining the "unless" provision of undue hardship.

The Bankruptcy code in relation to student loans was modified again in 1990. The 5-year waiting period was found to be deficient in length and was changed to 7-years.  In addition that rule applied to both Chapter 7 and 13 bankruptcies.

In 1998, the waiting period was removed completely.  In Chapter 7 and 13 all educational loans are excepted (meaning not allowed) from being discharged in bankruptcy. The only provision allowed to override that exception is "unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependants". 

Congress and the Bankruptcy committee wrote this provision and it became what we now know as 11 U.S.C.A. §523(a)(8), the undue hardship clause.  And as has been stated here previously, Congress did not take the time to define the term undue hardship for the courts.

OK.... I think I will stop here for this week.  I wanted to get into the tests that have been used by the courts to prove the existence of undue hardship, however let's pick that up next time? Perhaps I will title that posting:  "Early Tests to Prove (justify) Undue Hardship" ?

Meanwhile, thanks for reading.  Please feel free to comment, and sign up for email notifications!  I think you will find this blog helpful if you are struggling with a student loan.

Thanks!  Richard Precht












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